Another Blockbuster Merger Decision From Vice Chancellor Strine

This post is from Steven M. Haas of Hunton & Williams LLP. In August, Vice Chancellor Leo E. Strine, Jr. upheld a special committee’s decision to postpone a stockholder meeting on the day of the meeting so that the company could solicit more support for a pending merger in Mercier v. Inter-Tel . In the analysis that follows, Travis Laster and I consider the implications of Inter-Tel for Delaware’s merger jurisprudence. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

 

As a doctrinal matter, Inter-Tel will stir much debate. Vice Chancellor Strine held that Unocal reasonableness should be the sole standard of review for decisions related to shareholder meetings on mergers, and that the more exacting standard announced in Blasius should be limited to director elections. The Vice Chancellor hinted that he might favor such an approach in Chesapeake v. Shore as well as in Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, an article he co-authored with Chancellor William T. Allen and now-Justice Jack Jacobs in The Business Lawyer in 2001.

Applying Unocal, Vice Chancellor Strine holds that the directors’ actions were “reasonable in relation” to a “legitimate corporate objective.” Nevertheless, after conducting his Unocal analysis, the Vice Chancellor also found a “compelling justification” for the board’s decision under Blasius, concluding that “compelling circumstances are presented when independent directors believe that: (1) stockholders are about to reject a third-party merger proposal that the independent directors believe is in their best interests; (2) information useful to the stockholders’ decision-making process has not been considered adequately or not yet been publicly disclosed; and (3) if the stockholders vote no . . . the opportunity to receive the bid will be irretrievably lost.”

Here are some other highlights of the opinion that emphasize more mundane issues:

1. The Vice Chancellor did not appear troubled by the fact that the Board “postponed” the meeting rather than convening the meeting for the sole purpose of adjournment. The Delaware General Corporation Law speaks only of adjournment, not of postponement. It has nevertheless been the widespread practice that a meeting can also be “postponed” without being convened and adjourned, and Inter-Tel supports this approach.

2. Inter-Tel does not resolve whether the “postponed” meeting must be treated as a new meeting for purposes of the notice to stockholders required under the DGCL. For a merger vote under Section 251, notice must be given at least 20 days in advance of the meeting. For an adjourned meeting, a new notice is not required if the date of the meeting is moved in a single adjournment by less than 30 days. The issue of sufficient notice for the postponement may have been raised by the parties but mooted when the Board again reset the date of the meeting so there would be enough time to satisfy a 20-day minimum-notice requirement. The argument that a “postponed” meeting should be treated as an “adjourned” meeting for purposes of shareholder notice therefore remains unaddressed.

3. Consistent with SEC guidance, the proxy had included a proposal seeking stockholder authority to “adjourn or postpone the special meeting” to solicit more proxies. A majority of the proxies voted had not granted that authority, but Vice Chancellor Strine had no trouble permitting the board to postpone the meeting.

4. In a footnote, VC Strine observed that, “[i]f the special meeting had actually been convened, Inter-Tel’s bylaws would seem to have required stockholder consent to adjourn.” Section 2.8 of Inter-Tel’s bylaws contains standard language providing that “The stockholders entitled to vote at the meeting, present in person or represented by proxy, shall have the power to adjourn the meeting form time to time.” The bylaws did not give the meeting chair the specific power to adjourn a meeting without a vote of stockholders.

While the Vice Chancellor’s comment in Inter-Tel is dictum, it may now be more difficult to assert that the chair of a meeting has inherent authority to adjourn without a vote of stockholders. Corporations who wish to preserve the power of the chair to adjourn a meeting without a vote of stockholders should make that authority express in their bylaws.

5. Vice Chancellor Strine recognized that directors are entitled to take steps to promote and obtain approval of the matters they recommend, such as a merger. “News flash: directors are not supposed to be neutral with regard to matters they propose for stockholder action.”

6. Vice Chancellor Strine agreed that the following factors were sufficient to justify a same-day meeting postponement at a time when the directors knew the merger would be voted down and had been advised by their proxy advisor that a delay might change the outcome: (i) ISS’s suggestion that it might change its negative recommendation if it had more time to study recent market events (including the debt market’s volatility and the bidder’s refusal to increase the consideration), (ii) a founder’s competing proxy proposal for a recapitalization that was still being reviewed by the SEC, and (iii) the board’s desire to announce the company’s negative second-quarter results. The Court found that the directors acted with “honesty of purpose” and noted that they did not have any entrenchment motive because they would not serve with the surviving entity. It does not appear that the directors stood to receive material amounts from director options or other payments that would vest or accelerate in connection with the merger.

7. The court recognized the possibility that, by setting a new record date, the special committee permitted merger arbitrageurs to purchase more shares and ensure approval of the merger. Noting his reluctance to “premise an injunction on the notion that some stockholders are ‘good’ and others are ‘bad short-termers,'” Vice Chancellor Strine ultimately found that “the reason why the vote came out differently . . .  was not because the stockholders eligible to vote were different, but because stockholder sentiment regarding the advisability of the Merger had changed.” The Vice Chancellor nevertheless left room for future challenges in cases in which arbitrageurs materially influence the outcome of merger votes when a record date is changed.

8. Vice Chancellor Strine criticized the “coy nature” of the directors’ disclosures on the postponement, which failed to describe the potential arbitrage implications arising from a new record date or point out that the merger would have been voted down at the meeting. He nevertheless held that those facts were immaterial to the merits of the merger itself.

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