Court of Chancery Criticizes Recommendation Provision in Merger Agreement

Allen M. Terrell, Jr. is a director at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In In re NYSE Euronext Shareholders Litigation, C.A. No. 8136-CS (Del. Ch. May 10, 2013) (TRANSCRIPT), Chancellor Strine of the Court of Chancery, ruling from the bench following oral argument, declined to enjoin preliminarily a stockholder vote on the proposed merger between NYSE Euronext (“NYSE”) and IntercontinentalExchange, Inc. (“ICE”). The Court found that plaintiffs had not established any of the necessary elements for injunctive relief, but nonetheless criticized a provision in the merger agreement that restricted the NYSE board’s ability to change its recommendation when faced with a partial-company competing bid.

The proposed $9.5 billion merger between NYSE and ICE offered NYSE stockholders a mix of cash and stock valued at $33.12 per share. The stock portion of the consideration represented 67 percent of the total consideration offered to NYSE’s stockholders. Based on the Delaware Supreme Court’s decision in In re Santa Fe Pacific Corp. Shareholder Litigation, 669 A.2d 59 (Del. 1995), the Court rejected plaintiffs’ argument that Revlon applied to the mixed-consideration deal. After concluding that Revlon did not apply, the Court considered the reasonableness of the board’s process and concluded that plaintiffs did not have a reasonable probability of success on the merits.

The Court thereafter considered the recommendation provision in the merger agreement. After the deal was announced, no other potential acquiror expressed serious interest in any alternative transaction—such as an acquisition of Liffe, NYSE’s European derivatives business. Had a potential alternative transaction emerged, however, the NYSE board may have been restricted under the terms of the merger agreement from changing its recommendation to vote in favor of the merger with ICE. That is, the provision at issue only allowed the board to change its recommendation where an alternative proposal emerged that was unsolicited and was determined by the board to be a Superior Proposal, defined in the merger agreement as a sale of 100 percent of NYSE’s assets or stock.

During oral argument and in its ruling, the Court expressed skepticism toward forced-recommendation provisions in general, characterizing them as “contractual promises to lie in the future,” which, among other things, “potentially subjects people to liability” and “deal risk.” Despite such criticism, the Court acknowledged that the board’s “fiduciary judgment in dealing with a contract, can’t be just isolated provision by provision” particularly where such a provision might be used as a bargaining chip to obtain the highest value reasonably available for the stockholders. Notwithstanding the Court’s criticism, the Court ultimately ruled that the provision at issue could not support an injunction because there was no alternative offer or indication of interest that the NYSE board would have been constrained from considering. Finally, with respect to the balance of the equities, the Court concluded that NYSE’s stockholders had the ability to choose for themselves whether to approve the transaction. Accordingly, the Court denied plaintiffs’ motion for preliminary injunction.

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