In Re Volcano Corporation Stockholder Litigation
2016 WL 3583704, 2016 Del. Ch. LEXIS 99, 143 A.3d 727 (2016)
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Rule of Law:
Stockholder approval of a merger through a fully informed, uncoerced, disinterested tender offer under DGCL Section 251(h) has the same cleansing effect as a statutorily required stockholder vote, rendering the business judgment rule irrebuttable and limiting challenges to waste.
Facts:
- In December 2012, Volcano Corporation issued $460 million in Convertible Senior Notes and simultaneously entered into Call Spread Transactions (Options and Warrants) with Goldman, Sachs & Co. and J.P. Morgan to mitigate dilution, with Goldman handling 65% of these financial instruments.
- In 2014, Volcano's CEO, R. Scott Huennekens, initiated a market check, but five strategic buyers contacted by Volcano and its financial advisor, Goldman, all declined to pursue a transaction.
- Philips Holding USA Inc. expressed interest in acquiring Volcano, and after initial offers of $24 per share (July 2014) and subsequent lower offers were rejected by Volcano's Board and Transaction Committee, Philips ultimately offered $18 per share in November 2014.
- As part of the proposed merger, Philips negotiated a consulting agreement with Volcano's CEO, R. Scott Huennekens, which provided for post-merger services and triggered $7.8 million in severance benefits upon the merger's consummation.
- On December 16, 2014, Volcano's Board, after receiving Goldman's fairness opinion and reviewing Huennekens' consulting agreement, unanimously approved the merger agreement for $18 per share with Philips, to be structured as a two-step transaction under DGCL Section 251(h).
- Philips subsequently commenced a tender offer to purchase all of Volcano’s outstanding common stock for $18 per share, which resulted in 89.1% of Volcano’s shares being tendered and the consummation of the merger under Section 251(h) without a stockholder vote.
- The completion of the merger led to the termination of the Call Spread Transactions, resulting in a $24.6 million net payment from Volcano to Goldman, and approximately $8.9 million in accelerated stock options and restricted stock units for Volcano's Board and senior management.
Procedural Posture:
- On December 22, 2014, and January 9, 2015, Plaintiffs Melvin Lax, Melissa Gordon, and Mohammed Munawar filed individual class action complaints in the Court of Chancery of the State of Delaware, seeking to enjoin the proposed merger.
- On January 12, 2015, Plaintiffs each filed separate motions for expedited proceedings.
- On January 16, the Court of Chancery consolidated the three actions into a single action.
- On January 22, after Volcano made supplemental disclosures, Plaintiffs withdrew their motion for a preliminary injunction, and the scheduled hearing was cancelled.
- On March 2, 2015, after the Merger closed, Plaintiffs filed their Verified Consolidated Amended Class Action Complaint.
- On May 8, 2015, Defendants (Volcano's Board members and Goldman, Sachs & Co.) filed motions to dismiss the Complaint under Court of Chancery Rule 12(b)(6).
- By August 2015, the parties had completed their initial round of briefing on the motions, and in December 2015, they stipulated to a supplemental round of briefing to account for relevant Delaware Supreme Court decisions, which was completed in February 2016.
- On March 15, 2016, an oral argument on the motions to dismiss was held before Vice Chancellor Montgomery-Reeves.
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Issue:
Does the approval of a cash-out merger by a majority of a target company's outstanding shares through a fully informed, uncoerced, and disinterested tender offer under Delaware General Corporation Law Section 251(h) invoke the irrebuttable business judgment rule standard of review, insulating the transaction from all claims except waste?
Opinions:
Majority - Montgomery-Reeves, Vice Chancellor
Yes, the approval of a cash-out merger by a majority of a target company's outstanding shares through a fully informed, uncoerced, and disinterested tender offer under Delaware General Corporation Law Section 251(h) does invoke the irrebuttable business judgment rule standard of review, insulating the transaction from all claims except waste. The court based this decision on the Delaware Supreme Court’s Corwin v. KKR Financial Holdings LLC and Singh v. Attenborough decisions, which established that a transaction, not subject to the entire fairness standard, approved by a fully informed, uncoerced vote of disinterested stockholders, receives the irrebuttable protection of the business judgment rule. The court explicitly extended this principle to Section 251(h) mergers effected via tender offers, finding that Section 251(h) addresses the traditional concerns regarding coercion and board involvement in tender offers. Specifically, Section 251(h) requires a board-negotiated merger agreement, similar disclosure obligations to a traditional vote, a tender offer for all outstanding stock, identical consideration in both steps, and available appraisal rights, thus eliminating policy reasons for distinguishing it from a statutorily required stockholder vote. The court found Volcano’s stockholders were fully informed, dismissing plaintiffs’ argument that the omission of the exponential decay rate of the Warrants’ value was material. The court reasoned that stockholders were aware the Warrants’ value would decline over time, and the specific rate of decay would not have significantly altered the “total mix” of available information regarding Goldman’s potential conflict of interest. Since the business judgment rule irrebuttably applied and the plaintiffs failed to plead facts from which it could be reasonably inferred that the merger constituted waste (i.e., that it could not be attributed to any rational business purpose), the breach of fiduciary duty claims against the Board were dismissed. Consequently, the aiding and abetting claim against Goldman also failed due to the absence of an underlying breach by the Board and insufficient allegations of Goldman's knowing participation or scienter.
Analysis:
This case significantly clarifies the application of the Corwin doctrine to mergers structured as two-step tender offers under DGCL Section 251(h), affirming they receive the same robust protection of the irrebuttable business judgment rule as mergers approved by a traditional stockholder vote. The ruling provides greater certainty for corporate boards and financial advisors engaging in Section 251(h) mergers, making it substantially more challenging for plaintiffs to succeed on breach of fiduciary duty claims absent clear allegations of waste. It reinforces the Delaware judiciary's policy of deferring to the informed will of disinterested shareholders in non-controlling transactions, thereby limiting judicial second-guessing of deal terms when stockholders have the opportunity to make a voluntary, informed choice.
