Merger valuation disclosures were adequate. Chancery applies business judgment rule to breach of fiduciary duty action


The business judgment rule has featured prominently in a number of recent breach of fiduciary duty cases in front of the Delaware Court of Chancery. Under the rule, the court must not interfere in a transaction if a majority of the minority shareholders approved the deal and the vote was “uncoerced and fully informed.” If defendants can show those conditions were met, the court is likely to grant their motion to dismiss and put a stop to the litigation.

Plaintiffs opposing the transaction typically try to argue in favor of a higher level of scrutiny by claiming the vote was not properly informed. Specifically, in a recent case, the plaintiffs contended the disclosures related to the valuation analysis underlying the financial advisor’s fairness opinion were inaccurate or incomplete.

The case arose out of the 2015 sale of a company that developed healthcare software to IBM. Goldman Sachs (Goldman) was the financial advisor for the transaction. It issued a fairness opinion that declared IBM’s offer “fair from a financial point of view.” A majority of the disinterested shareholders approved the transaction. Goldman worked on a contingency-fee basis and earned $13 million when the merger closed.

The plaintiffs averred the board members breached various duties to the company and the shareholder vote was inconsequential because the definitive proxy for the merger had material defects. For one, it failed to disclose that Goldman treated SBC as a cash expense; secondly, it did not adequately describe the present value of the company’s NOLs.

The court rejected the argument. According to the court, “when a banker’s endorsement of the fairness of a transaction is touted to shareholders, the valuation methods used to arrive at that opinion as well as key inputs and range of ultimate values generated by those analyses must also be fairly disclosed.” The proxy in this case disclosed the key inputs and valuation methodology (discounted cash flow analysis), the court concluded.

Finding the vote was fully informed and uncoerced, the court dismissed the plaintiffs’ complaint.

Find more details on In re Merge Healthcare Inc., Stockholders Litig., 2017 Del. Ch. LEXIS 17 (Jan. 30, 2017), here.

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