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Successful Two-Step Tender Offer has the Same Revlon Cleansing Effect as a Stockholder Vote

By | July 1, 2016

The plaintiffs in In Re Volcano Corp. Stockholder Litigation were former public stockholders of a company that was acquired for $18 per share in an all-cash merger. Just five months prior, the target company had declined an offer of $24 per share from the same acquiror. After the companies announced the merger, the plaintiffs brought an action against the target company’s board of directors and others.  Among other things, the plaintiffs’ claimed that the board breached its fiduciary duties in approving the merger.

The transaction was structured as a two-step tender offer under Section 251(h) of the Delaware General Corporation Law, or DGCL. Section 251(h) permits a merger agreement to include a provision eliminating the requirement of a stockholder vote to approve certain mergers if the acquiror consummates a tender or exchange offer that results in the acquiror owning at least such percentage of the shares of stock of the target corporation that, absent Section 251(h), would be required to adopt the agreement of merger by the DGCL and by the certificate of incorporation of the target corporation.

Because Volcano’s stockholders received cash for their shares, the Revlon standard of review presumptively applied.  Defendants contended, however, and the Court agreed, that because Volcano’s fully informed, uncoerced, disinterested stockholders approved the merger by tendering a majority of the Company’s outstanding shares into the tender offer, the business judgment rule standard of review irrebuttably applied.

The Court noted that in Singh v. Attenborough, the Delaware Supreme Court held that upon a fully informed vote by a majority of a company’s disinterested, uncoerced stockholders, the business judgment rule irrebuttably applies to a court’s review of the approved transaction, even when that vote is statutorily required and the transaction otherwise would be subject to the Revlon standard of review.

The Court held the same reasoning in Attenborough applied to a two-step merger under Section 251(h) of the DGCL. The Court found that a target board’s role in negotiating a two-step merger subject to a first-step tender offer under Section 251(h) is substantially similar to its role in a merger subject to a stockholder vote under Section 251(c) of the DGCL.  A target corporation’s board must negotiate, agree to, and declare the advisability of the terms of both the first-step tender offer and the second-step merger in a Section 251(h) merger, just as a target corporation’s board must negotiate, agree to, and declare the advisability of a merger involving a stockholder vote under Section 251(c).  The Court also found that that there were no policy considerations that provided any basis for distinguishing between a stockholder vote and a tender offer.  According to the Court, a stockholder is no less exercising her “free and informed chance to decide on the economic merits of a transaction” simply by virtue of accepting a tender offer rather than casting a vote. And, judges are just as “poorly positioned to evaluate the wisdom of” stockholder-approved mergers under Section 251(h) as they are in the context of corporate transactions with statutorily required stockholder votes.

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