In re Orchard Enterprises, Inc. Stockholder Litigation: Delaware Court of Chancery Provides Guidance on Squeeze-Out Mergers and Entire Fairness Review at Summary Judgment

Sullivan & Cromwell LLP - March 14, 2014
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In a recent opinion analyzing breach of fiduciary duty claims in a summary judgment context brought more than two years after the consummation of a squeeze-out merger against the target company’s directors who approved the merger, the target and its controlling stockholder, the Delaware Court of Chancery (Laster, V.C.) held that:

  • following the Court’s May 2013 decision in In re MFW Shareholders Litigation, which was unanimously affirmed today by the Delaware Supreme Court sitting en banc, entire fairness review applies to a squeeze-out merger where the controlling stockholder does not agree up front to condition the transaction on both the affirmative recommendation of a fully-empowered special committee of independent and disinterested directors and approval by a majority of the minority stockholders.
  • it is not sufficient just to put procedural protections in place to shift the burden to prove unfairness to the plaintiff; the controlling stockholder and the target’s directors must establish the effectiveness of those procedures by establishing either (i) the absence of any genuine issue of material fact with regard to the special committee’s independence and disinterestedness (i.e. that it exercised real independent bargaining power and the controlling stockholder did not dictate the terms of the transaction) or (ii) that as a matter of law the majority-of-the-minority vote was fully informed.
  • a special committee structure generally only permits burden shifting if the controlling stockholder fully discloses to the committee all material information known to it other than the price at which it will buy or sell and how it would finance a purchase or invest the proceeds of a sale.
  • there was insufficient evidence at the summary judgment stage to support a determination that the squeeze-out merger was unfair because factual disputes about the full range of potential disclosure violations by the target’s directors and its controlling stockholder and a determination about whether the merger price fell within the range of reasonableness need to be resolved at trial.
  • directors could not avail themselves of exculpatory (Section 102(b)(7)) provisions in a company’s charter at the summary judgment stage to dismiss breach of fiduciary claims because evidence of procedural and substantive unfairness exists; only after determining entire fairness at trial will the Court be able to decide on a director-by-director basis which directors are entitled to exculpation from liability.
  • notwithstanding the passage of time, rescissory damages may be appropriate post-closing where a fiduciary has violated the duty of loyalty and the squeeze-out merger fails the entire fairness test.
  • a quasi-appraisal remedy may be appropriate for minority shareholders who are squeezed out by controlling shareholders who breach their duty of disclosure and that disclosure contributes to a finding that the merger fails the entire fairness test; a stockholder seeking post-closing damages for disclosure violations, however, must still prove causation and damages.
  • an inaccurate summary of a proposed charter amendment in a meeting notice is material as a matter of law because Delaware law requires the meeting notice to disclose a correct summary of the changes to be effected.
  • a corporation has no liability for breaches of fiduciary duty by its directors because the corporation itself does not owe fiduciary duties and cannot aid and abet breaches of fiduciary duty by its fiduciaries.