The Delaware Court of Chancery recently addressed a number of claims commonly made in the “ubiquitous” stockholder litigation that follows announcement of a public merger or acquisition transaction. In Dent v. Ramtron Int’l Corp., C.A. No. 7950-VCP (Del. Ch. June 30, 2014), a stockholder of Ramtron International Corp. filed suit after Ramtron was acquired by Cypress Semiconductor Corporation pursuant to an all-cash tender offer. The plaintiff alleged that Ramtron’s directors breached their fiduciary duties by failing to maximize the value of the company, adopting several “preclusive” and “draconian” deal protection devices, and failing to fully disclose material information in the company’s proxy statement, and that Cypress aided and abetted those breaches. The Court granted the defendants’ motion to dismiss, finding that the plaintiff failed, in each count, to state a claim upon which relief could be granted. In doing so, the Court essentially set forth a roadmap for stockholders considering so-called “strike suits” and for corporations in preempting such suits.
Duty of Loyalty
The plaintiff first alleged that Ramtron’s directors breached their fiduciary duties by failing to maximize the sale price of the company and by adopting deal protection devices to ensure the transaction was consummated. Since Ramtron’s certificate of incorporation contained an exculpatory provision barring claims for monetary liability against the directors for breaches of the duty of care, the plaintiff’s claims were limited to those based on a breach of the directors’ duty of loyalty or bad faith conduct.
With respect to the allegations that the Ramtron board breached its duty of loyalty, no facts were presented indicating that the board was not both disinterested and independent. As for the allegations of bad faith, which could also sustain a claim for breach of the duty of loyalty, the Court first examined the events leading up to the Ramtron board’s approval of the transaction with Cypress. The Court stated that to sustain a disloyalty claim premised on intentional disregard of duties, the plaintiff would be required to demonstrate more than an “inadequate or flawed” effort to carry out fiduciary duties; rather, the Court must be presented with an “extreme set of facts” demonstrating a “conscious disregard” for such duties. The Court noted that at the time of Cypress’s initial offer, Ramtron was not for sale. Thus, the board’s rejection of that offer was not subject to the Revlon enhanced scrutiny standard of review, but was rather afforded the protection of the business judgment rule. In the context of the ensuing sale process, by which point the board had already assumed Revlon duties, the board convened to analyze and discuss the Cypress offers, retained and met with outside legal and financial advisors to explore strategic alternatives, and reached out to third parties in an effort to obtain other offers. The Court stated that even if the sale process run by the board was “imperfect” and it “undertook the wrong strategy,” those facts, without more, did not make it reasonably conceivable that the board consciously disregarded its duties in agreeing to the transaction with Cypress, thereby precluding a finding of bad faith.
The plaintiff next alleged that the Ramtron board acted in bad faith in deciding to sell the company at a price that, while representing a 71% premium to the company’s unaffected stock price, was below the valuation range implied by the discounted cash flow (DCF) analysis conducted by Ramtron’s financial advisor. The Court rejected this argument in light of the fact that the consideration was within the range of the three other analyses conducted by the financial advisor (all four of which were disclosed in the company’s proxy statement), and further, the board had made multiple counterproposals and was able to negotiate an increase from Cypress’s initial bid.
The plaintiff finally alleged that the Ramtron board acted in bad faith by locking up the deal “impermissibly” in the acquirer’s favor using various deal protection devices, including a non-solicitation provision, a standstill provision and a termination fee representing 4.5% of the total equity value of the deal. The Court refused to find bad faith solely based on the implementation of such deal protection devices, noting that Ramtron was “in play” for several months before the board agreed to the transaction with Cypress, during which time no deal protection devices were in place. Thus, it was unclear what other viable options the board had foregone by accepting the deal protection devices in the agreement with Cypress. With respect to the deal devices themselves, the Court specifically noted that the non-solicitation provision was coupled with a reasonable “fiduciary out” clause which mitigated the “preclusive” restrictions on the board’s ability to consider other transactions, and that the 4.5% termination fee was not “so far out of bounds” that it could only be explained by bad faith.
Duty of Candor
The plaintiff further alleged that the Ramtron board breached its duty of candor by omitting certain material facts from the company’s proxy statement, including management projections provided to the company’s financial advisor. The Court noted that Delaware law imposes no per se duty to disclose to stockholders financial projections provided to and relied on by a financial advisor. Rather, the question of whether such projections are material is a context-specific inquiry. In this case, because the proxy statement disclosed that the transaction consideration was lower than the DCF range, the magnitude of the difference, and that the DCF range was based on management projections, a reasonable stockholder could infer that the transaction consideration was lower than the Company’s estimate of its own future earning potential; therefore, disclosing the projections themselves would not provide stockholders with meaningful additional information or insight as to whether they should accept the transaction consideration or seek appraisal. A showing that the information merely would have been “helpful” to the stockholders in making that decision was insufficient. There must be a “substantial likelihood” that the disclosure of the omitted fact would have “significantly altered the ‘total mix of information made available.’”
In addition to clarifying the standard of conduct with respect to a number of claims commonly made by stockholders of a target company in the wake of a public merger or acquisition transaction, the Court’s decision in Ramtron may also affect how corporations draft their organizational documents. The difficulty of winning a Revlon claim has been proven time and time again, and the exculpatory provision in Ramtron’s certificate of incorporation further protected the company by forcing the plaintiff to bring a claim predicated on a breach of the duty of loyalty, rather than the duty of care, which—as the Court acknowledged—was more challenging to prove. Further, proponents of “fee-shifting” bylaw provisions, which permit a corporation to recover expenses from stockholders that unsuccessfully pursue intra-corporate litigation, would argue that the proliferation of “strike suits” similar to Ramtron only lends further support to the proposition that causing stockholder plaintiffs to bear these expenses would weed out the less meritorious suits.