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Chancery Analyzes Interested Stockholder Provision of DGCL Section 203

By | August 22, 2021

Suzanne Flannery v. Genomic Health, Inc. et al is a case about the acquisition of Genomic Health, Inc. (“Genomic” or the “Company”) by Exact Sciences Corp. (“Exact”) pursuant to a Merger Agreement.

Count I of the inevitable complaint asserted the Baker Brothers Entities, which were purportedly the controlling stockholders of Genomic, along with Exact and Genomic, violated Section 203 of the Delaware General Corporation Law because the Baker Brothers Entities separately agreed to sell their greater than 15% stake in Genomic to Exact prior to the Merger.  More specifically, Plaintiff contended that Defendants violated Section 203 because Exact entered into a business combination with Genomic two days after Exact became an interested stockholder.

Plaintiff claimed Exact became an interested stockholder of Genomic on July 26, two days prior to the Board signing the Merger Agreement, when the Baker Brothers Entities allegedly agreed to vote their shares in favor of the transaction.

Defendants disagreed and argued Plaintiff’s Section 203 claim failed for among other things, the following reasons:

  • Exact never became an “Interested Stockholder” because the Baker Brothers Entities did not agree with Exact to vote in favor of the Merger until after the Board approved the Merger (when the Voting Agreement was actually executed), and
  • the Board implicitly approved the Voting Agreement prior to July 26, the date Plaintiff claims the two sides came to an agreement.

Plaintiff pointed to the Proxy, which stated that on July 26 “representatives of Akin Gump contacted representatives of Skadden to inform them that the Baker Brothers Entities were no longer willing to agree to transfer restrictions on their shares between signing and closing, but would still agree to vote in favor of the transaction.” This, according to Plaintiff, evidenced an “agreement, arrangement or understanding for the purpose of acquiring . . . such stock,” in violation of Section 203.

According to the Court, the Proxy’s language did not evidence either a formal or informal meeting of the minds between the Baker Brothers Entities and Exact on prior to approval of the Merger on July 26. In fact, the Proxy disclosed that the Baker Brothers Entities had plainly rejected Exact’s proposed voting agreement and that they would only agree to a voting agreement with different terms.

The fact that that the Baker Brothers eventually expressed their intent to support the Merger did not change the analysis. Without an agreement, Exact cannot conceivably be classified as an Interested Stockholder and thus cannot have violated Section 203. This was further bolstered by the existence of the later-executed Voting Agreement, entered into immediately after the Board approved and executed the Merger Agreement. That agreement evidenced nothing more than the commonplace scenario where a large stockholder agreed to vote its shares in favor of a transaction approved and authorized by the board of the target company.

As to implicit approval, the Court noted the only reasonable inference was that the Board well understood Exact would require voting agreements in connection with the Merger.  By continuing to negotiate with Exact on those terms, the Board demonstrated its agreement to the unremarkable proposition that Exact would seek to secure the commitment of Genomic’s largest stockholder to the Merger prior to the stockholder vote. That agreement to the transaction which resulted in Exact becoming an Interested Stockholder,” prior to the parties themselves agreeing, excepted the transaction from Section 203’s proscriptions.

Ultimately, the Court found Plaintiff’s attempt to pigeonhole Defendants’ conduct into a violation of Section 203 was inconsistent with the statute’s designated purpose. According to the Court, Section 203 was intended “to strike a balance between the benefits of an unfettered market for corporate shares and the well-documented and judicially recognized need to limit abusive takeover tactics.”

The Court stated Plaintiff’s view of Section 203 would authorize the court to prevent a merger even when a target’s board was aware of, and did not object to, a buyer’s attempt to secure the endorsement of a significant stockholder in favor of a deal that the board itself was attempting to secure for all of the target’s stockholders. Even if Plaintiff was correct that the Board had not formally approved of either the Merger or Voting Agreement prior to July 26, and that there was a meeting of the minds between the Baker Brothers Entities and Exact with respect to voting on July 26, it was undeniable that the Merger was formally approved by the Board on July 28 (with full knowledge of the Voting Agreement negotiations) and endorsed by the Board much earlier than that.  Nothing about this dynamic suggested Exact was engaged in “abusive takeover tactics.” The Court noted that it should be hesitant to strain the statute’s language to cover situations that do not threaten the interests the statute was designed to protect. Therefore, Plaintiff’s Section 203 was dismissed.

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Topics: 
Litigation, M&A