A recent shareholder suit challenging the sale of a Chicago-based company to IBM was dismissed by a Delaware chancery court because the merger was supported by an informed and uncoerced vote of 80% of stockholders. When IBM acquired healthcare software developer Merge Healthcare, Inc., in 2015 for $1 billion, a group of Merge stockholders brought a class action complaint against Merge for what they charged was an improper sale process. The plaintiffs alleged the directors breached their fiduciary duties of loyalty and care due to self-interest in the transaction. (In Re Merge Healthcare Inc. Stockholder Litigation, Consol. C.A. No. 11388-VCG, Del. Chancery Court, 2017.)
The class action sought damages resulting from IBM’s acquisition of Merge’s publicly owned shares, which was supported by nearly 80% of Merge stockholders. On August 6, 2015, Merge’s board entered into an agreement granting the company’s common stockholders $7.13 in cash for each of their shares, a 31.8% premium to the market price. Preferred stockholders received $1,500 cash per share. The merger was completed on October 13, 2015, at an approximate value of $1 billion.
As part of the merger, certain Merge managers, including one of the defendant board members, entered into employment or transition arrangements with IBM.
The Merge plaintiffs filed an amended complaint on February 8, 2016, seeking compensatory damages for breach of fiduciary duties, alleging the defendants violated their “duties of care, loyalty, and independence” to the company’s stockholders by putting their personal interests first, entering the merger through an unfair process, and depriving stockholders of the “true value inherent in and arising from” the company. The complaint also claimed breach of the duty of disclosure, alleging that the defendants, acting in bad faith, “caused materially misleading and incomplete information to be disseminated” to the stockholders and failed to disclose material information.
The plaintiffs argued that most of the Merge board held interests in conflict with the company’s because a principal director, who owned 26% of the company’s stock, wished to divest his shares and that most other board members were beholden to him through their relationships, which allowed the director to control the company.
In dismissing the suit, the Delaware chancery court judge concluded that because a fully informed, uncoerced vote of Merge’s disinterested stockholders “cleansed” the transaction, the court was required to apply the business judgment rule. The plaintiffs asserted two related sources of injury—price and process claims arising from the merger, and disclosure-inadequacy claims that allegedly misled stockholders into voting for the merger and forgoing appraisal rights. “The former are cleansed, and the latter mooted, by a finding of adequate disclosures to stockholders,” the court wrote.
The court found that even if the stock affiliated with [the controlling board member] was removed from the calculation, a majority of the stock held by disinterested stockholders voted for the sale.
“Where a majority of the disinterested ownership of the corporate asset approves the transaction, in a manner both uncoerced and informed, the agent/principal conflict with directors is ameliorated, and the need for judicial oversight of the agents is reduced concomitantly,” Chancery Judge Glasscock wrote in the opinion. “Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests.”
Finding the disinterested stockholder vote fully informed and uncoerced, the judge applied the business judgment rule to the board’s approval of the merger and, because the plaintiffs did not allege waste and the controlling stockholder did not extract any personal benefits, dismissed the complaint.
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