In re Rehabilitation of Manhattan Re-Insurance Co., C.A. No. 2844-VCP (Del. Ch. Oct. 4, 2011). Read opinion here.

Issues Addressed

Whether the Court of Chancery has original and exclusive jurisdiction over insurance rehabilitation proceedings.

If so, whether that exclusive jurisdiction permits the Court, in its discretion, to divest jurisdiction over certain claims to an arbitration panel where the parties agreed to submit to arbitration prior to one of the parties becoming insolvent.

This summary was prepared by a former associate of Eckert Seamans.

Background

Manhattan Re-Insurance Company, a Delaware insurance company, and American Motorists Insurance Company (AMICO), an Illinois insurance company, are successors-in-interest to a number of reinsurance contracts entered into during the 1970s by both companies’ predecessors. The contracts included a mandatory arbitration provision requiring them to submit “any irreconcilable dispute between [the parties] in connection with the[ese] Agreement[s]” to a three-member arbitration panel.

The contracts also required AMICO to maintain a letter of credit (LOC) for Manhattan Re, which Manhattan Re could draw on if AMICO defaulted on its obligations to third-party claimants. When AMICO notified Manhattan Re that it was unable to extend its LOC, Manhattan drew down the full amount of the LOC – more than $7 million – and put that money in a separate account called the AMICO Fund.

In 2007, Manhattan Re became insolvent and subsequently proposed rehabilitation. The Court of Chancery appointed a receiver to handle the rehabilitation. In its plan of rehabilitation, the receiver proposed that Manhattan Re use the AMICO Fund as unrestricted assets to satisfy the claims of all creditors. AMICO objected to the plan, contending that the AMICO Fund is restricted cash collateral that can only be used to pay AMICO’s reinsurance obligations as the reinsurer for Manhattan Re. Additionally, AMICO “moved to refer the parties to arbitration for a binding determination of ‘the proper amount of the AMICO Fund and the specific rights and obligations of the [r]eceiver and AMICO with respect thereto,” and for a preliminary injunction prohibiting the receiver from distributing those funds during the arbitration.

Legal Analysis

As a matter of first impression, the Court considered Delaware’s Uniform Insurers Liquidation Act (UILA), found within 18 Del. C. §§ 5901-5932, and determined that the legislature intended to give the Court of Chancery “original and exclusive jurisdiction over the in rem proceedings of the rehabilitation, [but] does not give the Court of Chancery exclusive jurisdiction over all claims brought against the insolvent insurer,” such as in personam claims.

The Court noted that while the statute does not explicitly confer exclusive jurisdiction on the Court of Chancery, the statutory scheme suggests that the Court’s in rem jurisdiction is exclusive, and the jurisdiction over collateral proceedings is permissive; the main goal being the orderly liquidation or rehabilitation of the insurer.

AMICO’s claims against Manhattan Re were in personam claims, which the Court held could be referred to arbitration (pursuant to the original contracts executed in the 1970s between both parties’ successors). The Court could have decided to adjudicate the claims; however, because the parties previously agreed to arbitrate in a valid contract, and an arbitration panel is a “court” of competent jurisdiction, there was no reason to interfere with the terms negotiated and agreed by the parties. Further, the receiver assumes the position of the company and is obligated to honor the agreements of its predecessor.

The Court ruled that the receiver could continue to resolve the claims against Manhattan Re during the pendency of the arbitration, but stayed consideration of the receiver’s plan of rehabilitation until the arbitration was complete.

 In Johnston v. Pedersen, C. A. No. 6567-VCL (Del. Ch. September 23, 2011), read opinion here, the Court in a post-trial decision, found that that the defendant directors breached their fiduciary duties when issuing the Series B Preferred Stock and as a result, the holders of the Series B Preferred were not entitled to a class vote in connection with the removal of the incumbent board and the election of a new slate by written consent.

This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.

Background

By way of background, on August 24, 2010, the Xurex board exercised its authority under the blank check provision of the Xurex certificate of incorporation to authorize the issuance of up to 20 million shares of Series B Preferred. Like the Series A Preferred, the Series B Preferred carries one vote per share and votes with the common stock on an as-converted basis. However, unlike the Series A Preferred, the Series B Preferred had a class voting right which required a majority vote approving any matter that is subject to a vote of the common stockholders.

In April 2011, DuraSeal Pipe Coating Company began soliciting proxies from Xurex stockholders to remove the incumbent Xurex directors and elect a new board. In May, the Xurex board learned of the solicitation and began a counter-solicitation. On June 14, 2011, the plaintiffs delivered written consents which purported to remove the defendants as Xurex directors, fix the number of directors on the board at five, and elect five directors including plaintiffs Johnston and Rose. Also on June 14, 2011, the plaintiffs initiated an action seeking an order pursuant to 8 Del. C. § 225 declaring that the written consents were valid and effective.

Plaintiffs contend that the written consents represent approximately 69% of the outstanding common stock, 51% of the outstanding Series A Preferred Stock, and 13% of the outstanding Series B Preferred Stock. The defendant directors contend that they could not be removed or a new slate elected without the consent of a majority of the Series B Preferred Stock.

Analysis

The Court reviewed the directors’ action under the enhanced scrutiny test because the directors facing a proxy contest face an inherent positional conflict – enhanced scrutiny mandates that the directors persuade the Court that: (i) their motivations were proper and not selfish; (ii) they did not preclude stockholders from exercising their right to vote or coerce them into voting in a particular way; and (iii) their actions were reasonably related to a legitimate objective. When the vote involves an election of directors or touches on matters of corporate control, the directors cannot claim that the stockholders may vote out of ignorance or mistaken belief about what course of action is in their own interests.

Here, the Court found that the defendant directors adopted the class vote provision in the Series B Preferred for the specific purpose of preventing holders of a majority of Xurex’s common stock and Series A Preferred from electing a new board. The directors admitted at trial that they believed another control contest would be detrimental to the company, and that they wanted two particular directors to have time to implement their business plan. The Court, however, was unpersuaded and stated:

As a result of his discussions with supportive investors, Pedersen decided that the Series B Preferred should have some type of “super vote right” that would prevent a change of board control without the approval of the holders of the Series B Preferred. The board then implemented the “super vote right” in an expansive form that gave the Series B Preferred a veto over any action submitted to stockholders. The directors have attempted to justify this provision by claiming that Xurex needed capital and that key investors wanted assurance that Pedersen and the incumbent board would remain in charge. But the directors also admittedly wanted to preserve the incumbent board in place. Under the circumstances, the defendants failed to carry their burden of persuasion that the class vote provision was adopted in furtherance of a legitimate corporate objective. The incumbent directors could not act loyally and deprive the stockholders of their right to elect new directors, even though they believed in good faith that they knew what was best for the corporation.

Even assuming that the directors subjectively intended only to raise capital, the Court found that was “not a sufficiently compelling justification for issuing the Series B Preferred with a class vote on any issue that could be submitted to the corporation’s stockholders.” In the end, the Court found that even though the board acted in good faith, the defendant directors breached their duty of loyalty by issuing the Series B Preferred. While the board may have honestly believed that “a period of “stability” (i.e. entrenched incumbency) would be in the best interests of Xurex,” the Court noted that “[a]n inequitable purpose is not necessarily synonymous with a dishonest motive. Fiduciaries who are subjectively operating selflessly might be pursuing a purpose that a court will rule is inequitable.”

 

Professor Stephen Bainbridge, one of the country’s foremost experts on corporate law, who is often cited in the decisions of Delaware courts, writes here about why he loves corporations, with citations and quotes from luminaries throughout history to support his position. For example, he quotes Michael Novak as follows:

… private property and freedom of contract were “indispensable if private business corporations were to come into existence.” In turn, by providing centers of power separate from government, corporations give “liberty economic substance over and against the state.”

We try to keep the focus of this blog on Delaware Corporate and Commerical Litigation (as its title suggests.) On occasion there are people or events that have such a profound impact on all lawyers that they merit inclusion on these pages. The products of Steve Jobs’ company have become part of the daily practice of most lawyers I know and they have made us more productive. Thus have I justified inclusion of a link below to the commencement address Steve Jobs gave at Stanford University in 2005. (HT: Orin Kerr).  Beyond the impact his products have had on the daily practice of most lawyers, and even if you ignore other parts of his address, I think his thoughts in general about life and death are worth the few minutes it takes to listen and watch the audio/video at this link.

Professor Larry Hamermesh, the Ruby R. Vale Professor of Corporate and Business Law at Widener University School of Law, and a member of the Delaware State Bar Association’s Council of the Corporation Law Section, recently posted an article that we linked to here, about changing the Delaware default rule for the voting standard in director elections. Jim McRitchie responded to the good professor’s argument here, and now we have the benefit of Prof. Hamermesh’s “rebuttal” here.

This is classic productive conversation on an issue of great interest to those who want to follow the latest developments in corporate governance.

Supplement: Professor William Sjostrom Jr. previously addressed this issue in a post that Professor Hamermesh links to here.

In Gerber v. ECE Holdings, LLC, C.A. No. 3543-VCN (Del. Ch. Sept. 29, 2011), the Court of Chancery addressed a motion to both amend and supplement a complaint.

Issues Addressed

The differences between a motion to supplement and a motion to amend a complaint, as well as whether Rule 15 (aaa) bars a motion to amend after an answering brief has been filed in reply to a motion to dismiss.

Brief Background

This case involved a challenge to a purchase by Enterprise GP Holdings, L.P. (“EPE”) of Texas Eastern Product Partners, LLC (“Teppco GP”), from EPE’s controller. While those claims were pending, EPE merged into another entity. In light of the merger, the plaintiff sought to both supplement and amend his complaint.

Discussion

Court of Chancery Rules 15 (a) and 15 (d) encourage amendments when there is no prejudice. However, Rule 15 (aaa) is a “custom rule” in Chancery that forces a plaintiff to make a binary choice when confronted by a motion to dismiss: (i) either stand on one’s complaint and file an answering brief to oppose the motion to dismiss; or (ii) amend the complaint before a response to the motion to dismiss is submitted. Only in exceptional circumstances will the court allow a motion to amend after an answering brief is filed in response to a motion to dismiss, and no such circumstances existed here. Moreover, there was no showing that it “would not be just under all the circumstances” for the dismissal to be with prejudice, as provided under Rule 15 (aaa).

The defining difference between amended and supplemental pleadings under Court of Chancery Rule 15 is that supplemental pleadings deal with events that occurred after the pleading to be revised was filed. Amendments deal with events that occurred prior to the filing. There was no inexcusable delay or prejudice shown that would prevent the Court from granting the motion to supplement.

EPE, the entity on whose behalf the original claims were brought, no longer exists. The Court observed that:

“… in the corporate context, there are at least some instances in which an action originally brought on behalf of a corporation may be brought by the corporation’s former shareholders after the corporation has been merged out of existence.” See cases cited at footnotes 13 and 14.

New Jersey Carpenters Pension Fund v. infoGROUP, Inc., C.A. No. 5334-VCN (Del. Ch. Sept. 30, 2011), read initial opinion here and revised opinion here

Issue Addressed

Whether directors breached their duty of loyalty in connection with the sale of a company based on their domination and/or intimidation by the largest shareholder. 

Background

This case involved the claim that the directors of infoGROUP in March 2010 breached their fiduciary duty of loyalty in connection with the sale of the company. The allegations which survived the motion to dismiss were, in essence, that the sale of the company was orchestrated by the largest shareholder, Vinod Gupta, because he desperately needed liquidity. His need for liquidity was derived largely from his debt of millions of dollars that he owed in connection with settlements of prior derivative actions and SEC investigations. See, e.g., In re: infoUSA, Inc. S’holders Litig., 953 A.2d 963 (Del. Ch. 2007) (See highlights of this decision on blog here). The record indicated that Gupta did not have a material source of cash flow since he resigned as CEO several years ago, and more than half of his net worth was invested in his infoGROUP stock, which had ceased paying a dividend.

The Court reviewed allegations that only a sale of the company would generate the liquidity that Gupta needed because he would have suffered a substantial discount if he were to sell only his non-controlling shares, and it was observed also that if he sold all of his shares on the open market it would likely exert a downward pressure on the share price due to the large percentage of his ownership.

The allegations were that the other board members capitulated to Gupta’s demands for a sale after succumbing to pressure exerted through his pattern of threats and bullying, and unauthorized efforts to promote a sale of the company. His methods to campaign for a sale included what the Court referred to as “rather indelicate methods of persuasion,” such as threatening other board members with lawsuits. One chairman allegedly resigned as a result of Gupta’s bellicose behavior.

Gupta also allegedly disrupted the sale process by influencing the list of potential bidders, conducting unsupervised negotiations and leaking information about the sale of the various parties.

The Deficiencies in the Sale Process and Unfair Price

The alleged deficiencies included not treating all the bidders equally and favoring one bidder over another, as well as refusing to consider a counteroffer from another bidder and refusing to provide information to all interested bidders.

Legal Analysis

The Court referred to a recent Delaware Supreme Court decision in which motions to dismiss under Court of Chancery Rule 12(b)(6) would be viewed from the traditional standard which requires a denial of a motion “unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof.”

(1) Duty of Loyalty Claims

The claims included a breach of the fiduciary duty of loyalty against Gupta, as a director, because of his receipt of a unique financial benefit, namely liquidity, at the expense of other shareholders. Moreover, the allegations include that the remaining members of the board approved the sale in breach of their duty of loyalty and that they were controlled and bullied by Gupta and were therefore not independent.

(2) Business Judgment Rule and Entire Fairness

The Court reiterated the truism that the business judgment rule “is a presumption that directors of a corporation act independently, with due care, in good faith and in the honest belief that [their] actions were in the stockholders’ best interests.”

The Court recited the method to overcome that burden by alleging facts which, “if accepted as true, establish that a majority of the individual board members had a financial interest in the transaction or were dominated or controlled by a materially interested director.” If that presumption is rebutted, the “entire fairness standard of review” is applicable, with the initial burden of proving the entire fairness of the transaction to be borne by the defendants.

(3) Liquidity as a Special Benefit to Gupta Only

The Court noted prior case law (at footnote 32) which recognized liquidity “as a benefit that may lead directors to breach their fiduciary duties.” The record was replete with evidence that Gupta had substantial cash requirements but very little cash flow. Gupta ultimately received over $100 million in cash for the sale of his shares in the company and the Court, in an understatement, based on the facts of this case, stated that: “It would be naive to say, as a matter of law, that $100 million in cash is immaterial to a man in need of liquidity.”

The Court found that the liquidity benefit received by Gupta was a personal benefit not equally shared by other shareholders even though there was no allegation that Gupta received any additional compensation for his shares as the result of the merger from either side deals or other special terms such as compensation as an executive with the surviving company or golden parachutes.

Although all shareholders received cash in the merger, liquidity was a unique benefit to Gupta based on the illiquidity that resulted from the larger percentage of his ownership in the company, which was approximately 34%. The next largest shareholder had only 6% of the stock and all other shareholders also held relatively small, liquid positions, and therefore liquidity was not a benefit to them as it was to Gupta. Therefore, the Court found that Gupta suffered a disabling interest when considering how to cast his vote in connection with the sale.

4) Directors’ Lack of Independence

The Court found that in addition to Gupta who was an “interested director,” the other directors also lacked independence because they were dominated by a pattern of threats that intimidated them, even though there was no allegation that they were financially dependent upon Gupta or that there were disabling family or business relationships. The Court found that the intimidation by Gupta so dominated the other board members that it could be reasonably inferred that they capitulated to his demands through a pattern of threats that rendered them non-independent for purposes of voting.

(5) Direct v. Derivative

The Court performed an analysis about whether the claims were direct or derivative and concluded that the claims against the directors were of a type that allowed them to be pursued as direct claims and not as derivative claims.

In re OPENLANE, Inc. Shareholders Litigation, Cons. C.A. No. 6849-VCN (Del. Ch. Sept. 30, 2011), read opinion here.

Issue Addressed: Did the majority shareholders and the board of directors in this closely-held company breach their fiduciary duties by approving a merger in which they had sufficient control to provide the statutorily required consent and did not follow customary procedures, such as failing to obtain a fairness opinion and failing to include a “fiduciary-out”? Short answer: No.

The Paul Weiss firm provides an overview of the case here, referring to the deal structure as “sign and consent”, which was upheld under the Revlon standard and notwithstanding the Omnicare decision. Wachtell Lipton provides an analysis of the case here.  Comparisons with other Delaware disclosure decisions is available here.

Brief Overview

This action arises out of the proposed merger of OPENLANE, Inc. with a wholly owned subsidiary. Plaintiff brought a class action on behalf of the public shareholders of OPENLANE and moved to preliminarily enjoin the merger. This 46-page decision denied that motion. OPENLANE was in the business of selling leased vehicles that were turned in by lessees. In April 2010, they anticipated a decline in the number of vehicles coming off lease in 2011 and 2012, and signed an engagement agreement with a financial advisor to undertake a market outreach to a limited number of strategic acquirers. In May 2011, OPENLANE entered into a second agreement with its financial advisor which provided for a market outreach to a limited number of strategic acquirers including one that had already expressed an indication of interest.

On August 11, 2011, the board unanimously approved the merger and on August 15, 2011 entered into an agreement and plan of merger. The next day OPENLANE received consents from a majority of the preferred and common shareholders sufficient under Delaware law and the charter of OPENLANE to approve the merger agreement. The merger agreement with KAR provided that as a condition to closing, the holders of at least 75% of the outstanding shares of stock shall have executed and delivered written consents approving the merger, although that condition could have been waived by KAR. That condition was, however, satisfied on September 12, 2011. The merger agreement also included a no-solicitation provision and provided that $36 million would be held in escrow for at least 18 months to cover numerous contingencies, including indemnification obligations, and appraisal proceedings by shareholders.

Procedural Posture

On September 9, 2011, the plaintiff filed the complaint and a motion for a preliminary injunction requesting that the Court enjoin the merger.

Plaintiffs’ Arguments

Plaintiffs argued that the sales process undertaken by the board was flawed, and in violation of both Revlon and Omnicare.

The plaintiffs argued that the sales process was flawed because the board only contacted three potential buyers, failed to perform an adequate market check, failed to receive a fairness opinion and relied on scant financial information which led to a transaction that failed to maximize shareholder value. The plaintiffs also argued that the members of the board breached their fiduciary duty by agreeing to improper deal protection devices such as the no-solicitation clause and because the management owned a majority of the shares which made shareholder approval almost certain – – and there was also the absence of a fiduciary-out provision. The complaint also alleged that the board was motivated by improper reasons such as by an offer of employment in the surviving company and the acceleration of stock options.

After reciting the familiar standard for preliminary injunctions, see footnote 14, the Court parsed each of the allegations.

For example, the Court reviewed the Revlon claims and observed that there is no single path for the board to follow in order to maximize stockholder value but the directors must follow a path of reasonableness which leads to that goal. The Court observed that “if a board fails to employ any traditional value maximization tool, such as an auction, a broad market check, or a go-shop provision, that board must possess an impeccable knowledge of the company’s business for the Court to determine that it acted reasonably.” See footnote 22.

The Court described the two-part analysis for the enhanced scrutiny involved in a change of control transaction: (a) a judicial determination regarding the adequacy of the decision making process employed by the directors, including the information that the directors based their decision; and (b) a judicial examination of the reasonableness of the directors’ action in light of the circumstances then existing. The Court focused on the gist of the review under the enhanced scrutiny standard in this context as requiring that the board demonstrate that “they were adequately informed and acted reasonably.”

Moreover, the Court reiterated the standard in the context of a preliminary injunction which requires a plaintiff to “establish a reasonable likelihood that at trial the members of the board would not be able to show that they had satisfied their fiduciary duties.” (citing Optima Int’l of Miami, Inc. v. WCI Steel, Inc., C.A. No. 3833-VCL, at 130 (Del. Ch. June 27, 2008) (transcript)). The Court explained in great detail why the plaintiff failed to present a compelling argument for injunctive relief and the Court also described in detail the satisfactory efforts that the board followed including the expertise by at least two members of the board who were very active in the industry.

Escrow Agreement

The Court found that although rare in deals with public companies, and common in deals for private companies, there is no inherent unfairness to shareholders of an escrow agreement, which is often incentive for buyers to pay more.

Defensive Devices Under Delaware Law to Lock up a Merger

Defensive devices which lock up a merger require special scrutiny under the two-part test in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). The first part of the Unocal test requires that the board demonstrate that it had reasonable grounds for believing a danger to corporate policy and effectiveness existed which is basically a process-based review. They demonstrate the first part of the Unocal test by demonstrating good faith and reasonable investigation but the process must lead to the finding of a threat. The second part of the Unocal test requires the board to demonstrate that its defensive response was reasonable in relation to the threat posed.

This inquiry also involves a two-step analysis. The board must first establish that the merger deal protection device is adopted in response to the threat and was not coercive or preclusive; and then demonstrate that their response was within a range of reasonable responses to the threat perceived.

To satisfy this burden the plaintiff must establish a reasonable likelihood that at trial the members of the board would not be able to show that they had reasonable grounds for believing a danger to corporate policy and effectiveness existed and that the response they adopted to combat the threat was reasonable in relation to the threat posed.

In a change of control transaction where a majority of the board has no interest in the surviving entity, the board does not have the entrenchment goal which the Supreme Court was worried may have motivated the directors in Unocal.

The Court explained those situations that the Supreme Court in Unocal regarded as either coercive or preclusive.

The Court also reviewed the Delaware Supreme Court decision in Omnicare in which the Supreme Court determined that shareholder voting agreements negotiated as part of a merger agreement, which guaranteed shareholder approval of the merger if put to a vote, coupled with the merger agreement that both lacked the fiduciary-out, and contained a Section 251(c) provision requiring the board to submit the merger to a shareholder vote, constituted a coercive and preclusive defensive device. See Omnicare, 818 A.2d at 935.

The Court distinguished the Omnicare decision because in that case the merger was a fait accompli. Instead, the merger before the Court in the instant case was not a fait accompli, in part because there was no evidence of a stockholders agreement to lock up statutory approval of the merger. Rather, the merger was approved through the solicitation of shareholder consents under 8 Del. C. Section 228. See footnote 48.

Shareholder Approval

Under the DGCL, a majority of a corporation’s outstanding stock must support a merger based on Section 251(c) and stockholders are allowed to demonstrate their approval through written consents under Section 228(a). See Optima, C.A. No. 3833-VCL at 127 (noting that nothing in the DGCL requires any particular period of time between the authorization by a board of a merger agreement and the necessary stockholder vote). See also footnote 53 (noting that there is no clear authority under Delaware law that would require a Court to automatically enjoin a merger agreement that did not contain a “fiduciary out” when no superior offer has emerged).

The facts of this case were that the majority consent was obtained one day after the board approved the merger, but the supermajority consent – – which was not needed to approve the merger but was a waivable condition to closing by KAR, came several weeks later.

The Court spent a substantial number of pages discussing the disclosure claims which it rejected.

The Court concluded the last few pages of the opinion with a review of the elements for the prerequisites for injunctive relief and found the absence of irreparable harm in addition to the failure to demonstrate a reasonable probability with success on the merits. As for the balancing of the equities, although the lack of an auction, the lack of a fairness opinion, the lack of a fiduciary-out or any post-agreement market check, did raise concerns, there were no better offers that came forward, and sophisticated buyers should understand that if a materially better offer were to be made, that judicial relief quite likely would have been available. In sum, the balancing of the equities did not favor enjoining the transaction and the motion for injunctive relief was therefore denied.

Final practical observation: It should be noted in closing that this hefty opinion was drafted, and all the briefing and a hearing occurred all in the space of approximately 3 weeks.

Gaines v. Narachi, C.A. No. 6784-VCN (Del. Ch. Sept. 30, 2011), read decision here. But see here for a subsequent letter ruling granting a motion to reconsider this decision on the issue of whether a colorable claim was demonstrated. This is a rare example of a motion for reargument under Rule 59(f) being granted.

Issue Addressed

In this short letter opinion the Court of Chancery denied a plaintiff/shareholder’s motion to expedite a previously filed motion for preliminary injunction–then partially reconsidered in a subsequent ruling.

This summary was prepared by a former associate of Eckert Seamans Cherin & Mellott. LLC.

Background

The plaintiff, a shareholder of AMAG Pharmaceuticals, Inc., initiated an action to stop AMAG from acquiring Allos Therapeutics, Inc. The plaintiff claimed that (1) AMAG’s directors breached their fiduciary duties by failing to maximize shareholder value; (2) the directors entrenched themselves by agreeing to extensive deal protections; and (3) the company’s disclosures concerning the transaction were inadequate.

Analysis

After noting that the plaintiff bears the burden to show a colorable claim and a sufficient possibility of irreparable harm on a motion to expedite, the Court addressed each of the plaintiff’s assertion in turn.

First, since AMAG is the acquiring company in the proposed transaction, the company is not “selling itself” or entering into a transaction that will result in a “change of control;” therefore, Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), would not apply. The Court could not review the transaction with heightened scrutiny under these circumstance, especially given that the majority of AMAG’s board was independent and disinterested.

Second, the defensive measures challenged by the plaintiff were not initiated by the board in response to any external threat. Rather, AMAG put the protections in place so that the merger could be completed without unnecessary intervention (rather than in response to a perceived threat). These types of deal protection are routine in finalizing a merger, and do not implicate Unocal-like scrutiny.

The plaintiff also asserted that AMAG’s board did not act in good faith when it rejected a third-party’s offer to acquire AMAG. Although the record contained some information about the third-party offeror, including questions about available funding for that third-party offer, the Court determined that the record was insufficient to find that the board did not act in good faith in rejecting that offer.

Third, the plaintiff did not allege that AMAG omitted disclosures of any material information. Without establishing materiality, there were no colorable disclosure claims for the Court to consider.

SUPPLEMENT: Note link above for subsequent grant of a motion for reconsideration of a portion of the initial ruling.

Merrill Lynch Trust Company, FSB v. Campbell, C.A. No. 1803-VCN (Del. Ch. Sept. 28, 2011). Read letter ruling here. Summaries of prior Chancery decisions in this case are available here and here.

Issue Addressed

In the latest iteration of this long running dispute, which has featured remands to the Court of Chancery from two appeals to the Delaware Supreme Court, the issue was whether an amendment to a counterclaim should be allowed even though the case was originally filed several years ago (prior to two separate appeals). The bottom line is that the Court granted the motion to amend under Court of Chancery Rule 15(a).

Brief Highlights

One of the noteworthy aspects of this short letter ruling for purposes of this blog is that the Court allowed the amendment of the counterclaim to include, in addition to existing claims for breach of fiduciary duty against a trustee, a consumer fraud claim under Section 2513 of Title 6 of the Delaware Code which provides for treble damages.

The Court allowed the counterclaim and rejected the argument that treble damages under the consumer fraud statute were either: (a) beyond the jurisdiction of the Court of Chancery; or (b) were beyond the scope of damages available under subchapter 8 of Chapter 25 of Title 6 of the Delaware Code.

Most notable, however, was the holding the claims were allowed to proceed in addition to the breach of fiduciary duty claims against the trustee, in part because the trustee services were determined to be included within the definition of “merchandise” under Section 2511(6) of Title 6 of the Delaware Code.

This decision may break new ground in terms of those situations where a breach of fiduciary duty may also make one subject to the treble damages under the consumer fraud statute in addition to the statutory scheme of Title 12 of the Delaware Code.