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

by Orrick - Securities Litigation and Regulatory Enforcement Group

https://jdsupra-html-images.s3-us-west-1.amazonaws.com/15c59d77-3af2-4182-be9d-95b8464e5434-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.

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