Ropes & Gray Discusses Limits of Delaware’s Corwin Decision

The Delaware Supreme Court’s decision in Corwin v. KKR Financial Holdings LLC set a high bar for plaintiff stockholders seeking to challenge public company mergers. Assuming a transaction that is not subject to entire fairness review was approved by a fully informed, uncoerced, disinterested vote of a majority of the stockholders of a target corporation, the business judgment rule applies to post-closing damage suits and, as further clarified by the Supreme Court decision in Singh v. Attenborough, a plaintiff could only challenge such a merger on the basis that it constituted waste. The decision in Corwin was later extended to “medium form” mergers under Section 251(h) of the Delaware General Corporation Law in In re Volcano Corporation Stockholder Litigation. Thus, recent decisions, taken together, altogether changed the contours of merger related litigation.

However, two decisions of the Delaware Court of Chancery issued in April 2017 illustrate how the outer boundaries of Corwin are further taking shape.

In In re Saba Software, Inc. Stockholder Litigation, Vice Chancellor Joseph Slights of the Delaware Court of Chancery declined to apply Corwin to dismiss post-merger claims against directors of the target corporation where plaintiffs’ complaint pled “facts that allow a reasonable inference that the stockholder vote approving the transaction was neither fully informed nor uncoerced.” Saba involved a target corporation that was embroiled in an accounting restatement and resulting SEC investigation due to financial fraud, and whose stock registration was revoked by the SEC shortly after signing the merger agreement. The Court concluded that certain material omissions in the proxy statement distributed to Saba stockholders regarding the circumstances that prevented the Company from restating its financials and other available alternatives for the Company did not permit Saba stockholders to make a “fully informed” decision and, therefore benefit from the cleansing effect of the stockholder vote under Corwin. Moreover, as a result of the deregistration of Saba common stock, the stockholder vote was accelerated beyond what was typically normal for a Delaware corporation. The Court concluded that the forced timing of the merger, together with the material omissions in the merger proxy, were “situationally coercive factors” that effectively deprived Saba stockholders, then holding “recently-deregistered, illiquid stock,” of free choice and forced them to vote in favor of the deal. Accordingly, and because the plaintiffs pled non-exculpated claims of bad faith, the court declined to apply Corwin as a bar to the litigation.

Conversely, in In re Paramount Gold and Silver Corp. Stockholders Litigation, Vice Chancellor Andre Bouchard  of the Delaware Court of Chancery found that the merger vote was both fully informed and uncoerced, despite allegations by the plaintiff that the failure to include additional information concerning analyst price targets and investment bankers’ involvement resulted in an uninformed vote and that a royalty fee and termination fee rendered the stockholders’ vote coerced. However, in doing so, the court highlighted, but did not resolve, the apparent conflict between a fully informed, uncoerced, disinterested stockholder cleansing vote under Corwin and the Delaware Supreme Court’s earlier holding in In re Santa Fe Pacific Corporation Shareholder Litigation that a fully informed stockholder vote does not preclude a post-closing Unocal claim with respect to deal protection measures.

While the facts in Saba were somewhat unique, the ruling does stand as an example of the types of disclosure omissions and imposed time pressure that will result in a court declining to apply to bar imposed by Corwin, regardless of any extenuating circumstances. At the other end of the spectrum, Paramount Gold should provide comfort that the failure to include immaterial disclosure will not be usable by plaintiff stockholders as a means to continue spurious claims beyond the motion to dismiss stage. The clear guidance from the Delaware Supreme Court would seem to dictate that there be more decisions like Paramount Gold and fewer like Saba.

This post comes to us from Ropes & Gray LLP. It is based on the firm’s alert, “Outer Boundaries of Corwin, and When a Stockholder Vote Will Cleanse Post-Merger Claims, Are Taking Shape,” dated May 1, 2017, and available here.