Have Your Directors Met Their Revlon Duties? Delaware Court Dismisses Strike-Suit Allegations as Merely Cosmetic

by Orrick - Securities Litigation and Regulatory Enforcement Group
Contact

http://blogs.orrick.com/securities-litigation/files/2012/10/iStock_000016259437XSmall-200x150.jpgIn a virtual course on how to bring—or not bring—an M&A strike suit, on June 30, a Delaware Chancery Court dismissed all shareholder claims against a merger target and its acquirer, ending nearly two years of litigation.  Though the allegations are familiar in the strike-suit context, the 45-page opinion which this ~$100 million merger yielded is notable for its methodical tour of Delaware fiduciary-duty law, 102(b)(7) exculpatory provisions, and so-called Revlon duties.  The roadmap opinion should be required reading for directors considering a merger.

Defendants Ramtron International and Cypress Semiconductor both work in the technology industry and the two began their courtship in 2011.  Though shareholder-plaintiff Paul Dent couldn’t prevent the 2012 Ramtron-Cypress marriage, he continued to hold out for a better dowry, naming Ramtron’s board and Cypress in a suit alleging that Cypress aided and abetted Ramtron’s board in breaching its duty to shareholders, and seeking quasi-appraisal of his shares.  Vice Chancellor Parsons disposed of these claims, taking the time to explain in unusual detail why the allegations utterly failed.

The opinion is suffused with the notion that suits of this ilk are tiresome.  Calling the allegations “routine in the ubiquitous shareholder litigation that immediately follows the announcement of any public company merger or acquisition,” and characterizing the complaint as “the proverbial laundry list of issues,” the court nonetheless gave each claim its due analysis as he dismantled the suit.

Before disposing of the individual breach-of-fiduciary duty claim, the court took the time to explain when a board’s Revlon duties kick in and how Delaware law limits claims in this context.  Taken from the landmark decision in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), Revlon requires a board to make a reasonable effort to obtain the highest value for the company in a change-of-control context.  But as the court explained, “Revlon duties are only a specific application of directors’ traditional fiduciary duties of care and loyalty in the context of control transactions.”  In this case, Ramtron’s certificate in Delaware contained a 102(b)(7) provision—i.e., a common provision adopted pursuant to Title 8, Chapter 1, Section 102(b)(7) of Delaware corporations law, which allowed Ramtron to bar claims for monetary liability against its directors for breaches of the duty of care.  As a result, the court explained that a breach claim could only be predicated on a claim for breach of the duty of loyalty or bad faith conduct.

Discussing the history of the case, the court noted that Ramtron wasn’t always in play, and that Revlon duties do not emerge every time a potential suitor approaches a target company.  One of the plaintiff’s allegations was that Ramtron impermissibly rejected Cypress’s initial advances in 2011.  But Ramtron’s board was not looking to change control at the time, and the distinction makes a difference:   “In other words, the duty of the Board had not changed from the preservation of Ramtron as a corporate entity to the maximization of the Company’s value at a sale for the stockholder’s benefit, and the Board’s conduct was subject to business judgment, not Revlon scrutiny.”  The plaintiff could not overcome the presumptions of the Business Judgment Rule, so the court tossed his claim for breach in connection with Cypress’s early overtures.

Though once Ramtron decided to shop itself its Revlon duties were implicated in full force, the board’s actions satisfied its fiduciary duties and thus defeated plaintiff’s claim.  In particular, the board inquired of more than twenty other potential acquirers and entered into non-disclosure agreements with those who were serious.  The board also rejected multiple offers from Cypress, negotiating the eventual tender offer up several times to the final number.  As to the plaintiff’s claim that Ramtron had adopted “draconian deal protective devices,” to the contrary, the court noted that the non-solicit, standstill, change-in-recommendation, information-rights, and termination-fee provisions did not “deviate in meaningful way from similar types of provisions that repeatedly have been approved by this Court.”  In other words, the terms were unremarkable and nowhere near draconian.  With no facts calling into question the directors’ independence or disinterestedness to support a loyalty claim, and no “extreme set of facts” to show bad faith, the Revlon claim had to be dismissed.  While the process may not have been perfect, “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.”

Turning to plaintiff’s duty-of-candor claim, the court explained that there is no per se duty under Delaware law to disclose to shareholders the financial projections given to and relied upon by a financial advisor in the change-of-control context.  Though the court allowed that management projections and other alleged disclosure deficiencies might have assisted shareholders in their decision whether to sell or seek appraisal, Delaware law requires that such information “be material, not merely helpful.”

Finally, the court dismissed the aiding-and-abetting claim against Cypress, noting that the two companies engaged in “contentious arms’-length bargaining, which resulted in Cypress increasing its offer for the Company numerous times.”  Even if plaintiff had stated a claim for breach of fiduciary duty, there was nothing showing that Cypress knowingly participated in such a breach.  Having presented a lengthy discourse on fiduciary duties in the Delaware M&A context, the court dismissed the entire case with prejudice.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Orrick - Securities Litigation and Regulatory Enforcement Group | Attorney Advertising

Written by:

Orrick - Securities Litigation and Regulatory Enforcement Group
Contact
more
less

Orrick - Securities Litigation and Regulatory Enforcement Group on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!