Caneel Radinson-Blasucci
In its recent In re OM Group, Inc. Stockholders Litigation (“OMG”) opinion, the Court of Chancery addressed an interesting wrinkle in determining the appropriate standard of review for assessing stockholder’s fiduciary duty claims regarding directors’ conduct in negotiating and closing corporate transactions. In OMG, the court responded to a claim made by Plaintiffs, OM Group, Inc. (the “Company” or “OM”) stockholders, against the Company’s directors (the “Board”). The stockholders alleged that the Board rushed to sell the Company “on the cheap” to avoid an embarrassing battle with its activist investors.
OM was a Delaware chemical and technology corporation comprised of five discrete units. OM was acquired by Apollo Global Management, LLC (“Apollo”) and Platform Specialty Products Corporation (“Platform”) on October 28th, 2015. Prior to the acquisition, OM faced financial troubles after a ten-year period (2005–2015) of unsuccessful growth strategies. Between 2014 and 2015, the value of the Company’s shares had fallen nearly 28% and analyst reports indicated that the Company’s low return on investment was a product of operational mismanagement. In 2013, OM was confronted by FrontFour, an activist shareholder that owned roughly 5.8% of OM’s outstanding stock. FrontFour requested specific operational changes that they believed would dramatically increase OM’s share price, and nominated three candidates for board positions with the Company. The Board initially “refus[ed] to entertain, FrontFourt’s proposals[,]” but eventually issues a press release indicating that it was “in the process of implementing most of FrontFourt’s proposals.”
In 2014, after receiving overtures from activists, the Board engaged BNP Paribas (“BNP”) to “assess potential value creation options” out of “concern that ‘activists could derail the execution to [OM’s] strategy’ by calling for ‘change[s] in capital priorities’ and an ‘externally driven change of board members.’” After receiving presentations from BNP as to the limited market for a sale of the entire Company, OM retained BNP to conduct a confidential market survey with payment contingent on the consummation of a merger.
OM engaged a second financial advisor, Deutsche Bank, “on a fully contingent basis, conditioning a payment of $5.32 million on the delivery of a fairness opinion and the closing of a transaction.” Ultimately Apollo acquired OM at $34.00 per share, below both BNP and Deutsche Bank’s suggested fair values, and the plaintiffs contended that the company was sold hastily to avoid a proxy fight with unhappy shareholders. Plaintiffs argue that in an attempt to “rush to the closing table” the Board violated its fiduciary duties.
As a threshold matter, the court discussed the applicable standard of review. The choice between standards of review is a crucial one as the court’s selection can be outcome determinative. The court noted three potentially applicable standards: the business judgment rule, enhanced scrutiny under Revlon, and entire fairness.
The court summarily disclaimed entire fairness review as Plaintiffs did not allege that the board operated under any conflict of interest. Plaintiffs contended that the merger should be subjected to Revlon enhanced scrutiny, which requires the court to determine whether fiduciaries acted “reasonably to pursue [a] transaction that offered the best value reasonably available.” Revlon scrutiny is less deferential to director’s decisions than the business judgment rule, which “insulate[s]” boards’ decisions “from all attacks other than on grounds of waste,” as such decisions are presumed to have been made with good faith and an honest belief that they are in the best interest of the corporation and its stockholders.
In determining the appropriate standard of review the court first noted that the Company’s stockholders were cashed out in the merger with Apollo, which might implicate the Revlon standard. However, before engaging in a Revlon enhanced scrutiny analysis the court notes that the merger was approved by “qualified decision makers”: the Company’s stockholders. The Delaware Supreme Court in Corwin v. KKR Financial Holdings, LLC held that if a corporate action is approved by a fully informed, uncoerced stockholder, then the business judgment rule applies. In such cases, the court presumes that the stockholders voted with their own best interest in mind, and will not interfere with the stockholders’ judgment.
Here, Plaintiffs attempted to avoid a shift to business judgment rule review under Corwin by arguing that the stockholder vote was uninformed. Plaintiffs alleged that (1) the Board failed to provide information regarding a competing bid for the Company by Advanced Technology & Materials Co., Ltd. (“Advanced”); (2) the Board failed to address an alleged conflict of interest held by one of its members; and (3) the board failed to disclose materially relevant information about Deutsche Bank.
Plaintiffs argued that the Board failed to disclose that Advanced made a written proposal for $35.00 to $36.00 per share (compared the $34.00 per share that Apollo ultimately paid in the merger) and that the board refused to consider a request by Advanced for extra time to submit a proposal. Plaintiffs further argued that, because of such omissions, they were mislead by information that the board disclosed about Advanced’s bid, including “references to defined terms within the Merger Agreement that place the potential proposal in context[.]” Despite Plaintiffs’ arguments, the court found that the Board’s omissions did not render its disclosures regarding Advanced’s bid materially misleading.
Plaintiffs also argued that the stockholder vote was tainted by the Board’s non-disclosure of one of its members’ alleged conflicts of interests. Steven Demetriou, a member of the Company’s Board, was also the chairman and CEO of a company partially owned by Apollo, and had lunch with an Apollo employee during the sales process. In assessing Plaintiffs’ claims the court noted that Plaintiffs must, “allege facts from which the Court may reasonably infer that ‘there is a substantial likelihood that a reasonable shareholder would consider [the omission] important in deciding how to vote.’” The court found that the Board’s failure to disclose Demetriou’s relationship with Apollo did not inhibit a fully informed stockholder vote and was not materially relevant to stockholders during the sales process. Specifically, the court noted that Plaintiffs’ did not allege that Apollo influenced Demetriou or that Demetriou influenced any other Board members. That court found that, notwithstanding his relationship with Apollo, Demetriou did not engage in interested dealings about which the stockholders ought to have been informed.
Plaintiffs further alleged that the stockholder vote was uninformed because the Board failed to disclose that its investment bank, Deutsche Bank received 140 Euro from Apollo in years preceding the transaction and was originally hired on a flat-fee basis, which was later changed to a contingency fee basis to be paid at the consummation of the merger. The court found neither non-disclosure compelling. The court noted that the Proxy statement stockholders received prior to the vote indicated that Deutsche Bank had received “significant fees” from Apollo prior to the merger. Though the Board did not disclose the amount of such fees until the day of the vote, its disclosure of the relationship between Deutsche Bank and Apollo was adequate.
Additionally, the court found the terms upon which the Company employed Deutsche Bank throughout the merger process were clearly expressed in the proxy statement and that prior terms of engagement were the type of “play-by-play” information not subject to disclosure. Having addressed and dismissed Plaintiffs’ arguments as to problems with the stockholder vote, the court determined that the vote was fully informed and uncoerced. Applying Corwin, the court applied the business judgment rule standard of review. Under the business judgment rule, the court noted that the only question remaining was whether merger constituted waste. Because Plaintiffs failed to allege that the merger was waste, the court dismissed the complaint.
Caneel is a second year student at Widener University Delaware Law School and a Staff Member on the Delaware Journal of Corporate Law.
Suggested Citation: Caneel Radinson-Blasucci, In re OM Group, Inc. Stockholders Litigation: The Value of a Vote, Del. J. Corp. L (Jan. 31, 2017), www.djcl.org/blog.