Corporate Law - Mergers and Acquisitions - Delaware Court of Chancery Imposes Revlon Duties on Board of Directors in Mixed Cash-Stock Strategic Merger

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In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., (1) the Delaware Supreme Court held that, when a Delaware corporation sells itself for cash, its directors are transformed "from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders." (2) Practically, Revlon means that any sale for cash will be closely scrutinized to ensure that no "considerations other than the maximization of shareholder profit" influenced the board of directors' decision to approve the transaction. (3) Under Revlon, a court examines both the price of the deal and the process used to reach that deal. (4) In contrast, the vast majority of other business decisions--including some sales of a company for stock--are subject to the highly deferential business judgment rule, (5) which shields a board's decisions from judicial scrutiny unless "a majority of the board suffers from a disabling interest or lack of independence" or the board is dominated by one or more directors with a "material and disabling interest." (6)

Recently, in In re Smurfit-Stone Container Corp. Shareholder Litigation, (7) the Delaware Court of Chancery applied Revlon to a merger in which the negotiated consideration was split equally between cash and stock of an acquiror without a controlling shareholder. Vice Chancellor Parsons held that, even though half of the merger consideration was to be paid in widely held acquiror stock, Revlon applied because the transaction "constitute[d] an end-game for all or a substantial part of a stockholder's investment in a Delaware corporation."8 While the court ultimately found that the target board met its duties even under Revlon, the decision to extend Revlon was premised on the tenuous conclusion that a hybrid cash-stock deal meant there would be "no tomorrow" for target shareholders.9 By applying Revlon to transactions in which half the consideration is paid in widely held stock of the acquiror, Smurfit-Stone has the potential to make target boards more reluctant to engage in mixed-consideration strategic mergers, for fear that agreeing to such deals will ultimately force a board to accept a subsequent, facially higher offer from an unfriendly buyer. The decision also places Delaware courts in a position to make judgments about the intrinsic value of mixed-consideration mergers, judgments that boards--not courts--are better equipped to make.

On January 23, 2011, less than seven months after Smurfit-Stone Container Corporation emerged from bankruptcy protection, the company entered into a merger agreement with Rock-Tenn Company. (10) The Smurfit-Stone board unanimously approved the deal, worth a total of $35 per share, after having rejected Rock-Tenn's two prior offers of $30.80 per share and $32 per share, each split equally between cash and Rock-Tenn stock. (11) Under the terms of the final agreement, Rock-Tenn would continue as the surviving corporation, and each Smurfit-Stone shareholder would receive, for each share held at closing, both $17.50 in cash and 0.30605 shares of Rock-Tenn stock--worth $17.50 at the time the deal was announced. (12) Based on the exchange ratio, legacy Smurfit-Stone shareholders would own approximately 45% of Rock-Tenn after the transaction. (13) The Smurfit-Stone board did not conduct a formal "market check" before agreeing to the merger, (14) but it did receive, consider, and reject an all-cash $29 per share offer from a "prominent private equity firm" in September 2010. (15)

Soon after the merger announcement, John M. Marks, a Smurfit-Stone shareholder, filed a class action suit in the Delaware Court of Chancery against Rock-Tenn, Smurfit- Stone, and all ten members of Smurfit-Stone's board of directors. (16) Alleging breach of fiduciary duty, Marks claimed that the board "failed to take steps to maximize the value of Smurfit-Stone to its public shareholders," (17) and sought to enjoin the transaction. (18) Additional suits by other shareholder plaintiffs followed shortly thereafter, alleging substantially the same claims. …