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From Securities Regulation Daily, January 30, 2017

Fully informed vote for Merge/IBM merger obviates entire fairness analysis

By Anne Sherry, J.D.

The Delaware Court of Chancery dismissed a post-closing damages claim arising from IBM’s acquisition of Merge Healthcare. Former Merge stockholders alleged that the company’s directors, including its chairman, Michael Ferro, breached their fiduciary duties by establishing an improper sale process. But even assuming Ferro was a controlling stockholder, the court found that he did not extract any personal benefit from the sale, and the fully informed vote of close to 80 percent of Merge stockholders triggered the business judgment presumption (In re Merge Healthcare Inc. Stockholders Litigation, January 30, 2017, Glasscock, S.).

Merge did not include an exculpation clause in its corporate charter, leaving directors exposed to liability for violations of the duty of care. The court did not reach the issue of whether there was a breach, however, because it found that the vote was uncoerced and fully informed, raising the presumption that the directors acted within their proper business judgment.

Vote’s cleansing effect. The court took a moment to explain the rationale behind Delaware’s cleansing doctrine. The state’s common law generally supports property rights and private ordering—parties to the sale of an individually owned asset may negotiate the transaction without interference. The common law of corporations is concerned about agency problems when ownership and control—and potentially interests—diverge in the sale of a corporate asset. Then, the court’s presence is necessary "to watch the watchmen." In the merger context, this means examining directors’ compliance with their fiduciary duties. Where a majority of the disinterested ownership of the corporate asset approves the transaction in an uncoerced and informed manner, this agent/principal conflict is ameliorated.

KKR explained. The Delaware Supreme Court wrote in Corwin v. KKR that "when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies" (emphasis added). The plaintiffs pointed to this language to argue that the cleansing doctrine does not apply to an entire-fairness case. But the chancery court subsequently clarified that the language does not mean that every form of transaction otherwise subject to entire fairness is exempt from cleansing. Instead, the only transactions subject to entire fairness that cannot be cleansed by stockholder approval are those involving a controlling stockholder, and even then, the controller’s presence does not trigger entire fairness per se.

Here, even assuming that entire fairness applied and that cleansing was unavailable because Ferro (who indirectly owned 26 percent of Merge stock) was a controlling stockholder, the court found that his interests were fully aligned with other common stockholders and that he did not extract any personal benefits. Ferro’s entitlement to a consulting fee, which he ultimately waived, did not poison the sale process. Rather, Ferro’s waiver fully aligned his interest with those of the other stockholders, and IBM increased its offer by the amount of the fee.

Furthermore, the court found that the stockholder vote approving the merger was fully informed. A plaintiff alleging that a vote was not fully informed must identify a deficiency in the disclosure document, shifting the burden to defendants to show that the alleged deficiency fails as a matter of law. The plaintiffs alleged disclosure violations contained in the summary of Goldman’s financial analysis and Ferro’s decision to waive his consulting fee. Reviewing these allegations in turn, the court held that they were not material to stockholders.

The case is No. 11388-VCG.

Attorneys: Brian D. Long (Rigrodsky & Long, P.A.) for Steven Merola. David J. Teklits (Morris, Nichols, Arsht & Tunnell LLP) and Howard S. Suskin (Jenner & Block LLP) for Merge Healthcare Inc.

Companies: Merge Healthcare Inc.

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers FiduciaryDuties MergersAcquisitions DelawareNews

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