The Delaware Supreme Court recently dealt another crushing blow to the Revlon doctrine that had governed review of mergers and sales of companies for decades, making shareholder suits to attack such transactions much more difficult to maintain. In Volcano Corp. Stockholder Litigation, the Court entered a two-sentence opinion on February 9, 2017 affirming a decision from Vice Chancellor Tamika Montgomery-Reeves that held approval by a fully informed, uncoerced majority of the disinterested stockholders “cleansed” the board’s decision to recommend the merger, making it subject to the more director-friendly “business judgment rule” (Chancery Court opinion).
The Revlon doctrine emanated from a 1986 decision of the Delaware Supreme Court, Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), which effectively eliminated the business judgment standard for review of directors’ actions in connection with a takeover, substituting a much more stringent standard. The doctrine required directors to prove their actions were consistent with a duty to maximize shareholder value in short term, including conducting an auction for the company. The doctrine was eventually applied to any merger or sale of the company, and in Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 828 (Del. 1993), the Court clarified that all such actions would be subject to enhanced judicial scrutiny, including a determination of the adequacy of the decision making process and information the directors considered, and the reasonableness of the directors’ actions in light of the circumstances.
In contrast, the business judgment rule entitles directors to a presumption that they acted on an informed basis, in good faith and in honest belief that the action taken was in the best interest of the company. Thus, in the M&A context, although the burden of proving that the stockholder ratification vote was fair, uncoerced, and fully informed remains with the board, once the board has met this standard the burden of proof for director wrongdoing shifts to the plaintiffs.
In conjunction with other director friendly decisions in the past year by the Delaware courts, including the Chancery Court decision in Trulia striking down “disclosure-only” settlements of stockholder class actions, plaintiffs’ attorneys are voicing concern over the increased difficulty of maintaining shareholder litigation. The recent decisions, however, are based on sound Delaware precedent, and, although they give director defendants additional arguments to support dismissing nuisance cases, they should not be read to sound a death knell for legitimate claims of corporate wrongdoing.