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From Securities Regulation Daily, January 6, 2017

Revlon does not apply to post-merger disclosure claims

By Anne Sherry, J.D.

The Delaware Court of Chancery dismissed a post-merger-closing damages claim by a shareholder of Solera Holdings, Inc. Applying Corwin v. KKR, the court held that the fully informed and uncoerced vote of disinterested shareholders triggered the business judgment presumption. The court also held that the plaintiff bears the burden of pleading disclosure deficiencies in the first place to test whether the vote was truly fully informed (In re Solera Holdings, Inc. Stockholder Litigation, January 5, 2017, Bouchard, A.).

Merger negotiations. In 2015 Solera began exploring a go-private sale. The process initially excluded a potential bidder that was a competitor, but that party ("Party B") was brought in after news of the negotiations leaked. The board approved a merger agreement with Vista Equity Partners that contained go-shop and termination fee provisions. About halfway through the go-shop, Party B informed the company that it would not submit a proposal due in part to a decrease in its own stock price and volatility in the financing markets. Solera stockholders approved the merger with Vista (but rejected, on an advisory basis, related compensation awards) on December 8, 2015. The merger closed the following March.

The plaintiff pension fund filed a class-action complaint asserting a single claim for breach of fiduciary duty against the eight members of Solera’s board during the sales process. The defendants moved to dismiss for failure to state a claim.

Revlon inapplicable. The merger did not involve a controlling stockholder, and the plaintiff did not assert that a majority of the board was not independent or disinterested. Instead, the plaintiff argued that the board’s conduct during the sale process and decision to approve the merger called for enhanced Revlon scrutiny. But the chancery court noted that Revlon was designed to provide for injunctive relief, not to address post-closing money damages. In the post-closing context, under Corwin, the business judgment rule applies to a transaction not subject to the entire fairness standard and approved by a fully informed, uncoerced vote of disinterested stockholders.

Burden of proof. The threshold question in this case was whether the stockholders’ approval was fully informed. On that question, the court decided, the burden was on the plaintiff to plead disclosure issues. Placing this burden on the defendants would "create an unworkable standard" by requiring them to prove a negative. The more sensible approach, the court wrote, is to require the plaintiff challenging a board’s decision to identify a deficiency in the disclosure document, at which point the burden would shift to the defendants to establish that the alleged deficiency fails as a matter of law.

Disclosure allegations lacked merit. The plaintiff briefed only two disclosure allegations, both of which the court held to be without merit. First, the plaintiff argued that the proxy omitted to disclose the special committee’s conflicts. But the only alleged conflict was the fact that two members of the committee also served on the compensation committee. This information was disclosed adequately to Solera stockholders, and the identity of the compensation committee members was not material to the merger vote given that the board unanimously approved the merger.

Second, the plaintiff argued that the proxy failed to disclose information bearing on the "purpose and effect" of compensation paid to management in connection with the merger. This argument seemed to the court to reflect a disagreement with the merits of that compensation decision rather than a genuine disclosure claim. The proxy statement itemized the specific amounts of retention awards that management would receive under certain conditions, and detailed the directors’ reasons for approving those awards. Similarly, there was no disclosure deficiencyregarding a special cash award to Solera’s CEO.

The case is No. 11524-CB.

Attorneys: R. Bruce McNew (Wilks, Lukoff & Bracegirdle, LLC) and Randall J. Baron (Robbins Geller Rudman & Dowd LLP) for City of Warren Police and Fire Retirement System. Raymond J. Dicamillo (Richards, Layton & Finger, P.A.) for Tony Aquila. William M. Lafferty (Morris, Nichols, Arsht & Tunnell LLP) for Vista Equity Partners Fund V, LP and Summertime Holding Corp.

Companies: City of Warren Police; Fire Retirement System; Vista Equity Partners Fund V, LP; Summertime Holding Corp.

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers ExecutiveCompensation FiduciaryDuties MergersAcquisitions Proxies DelawareNews

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