The Ever-Increasing Importance of the Shareholder Vote

Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and Gregory Beaman. This post is part of the Delaware law series; links to other posts in the series are available here.

On June 30, 2016, the Delaware Chancery Court extended the Supreme Court’s holding in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), to two-step mergers under DGCL § 251(h). The Chancery Court concluded that acceptance of a first-step tender offer by a fully informed and uncoerced majority of disinterested stockholders insulates a two-step merger from challenge except on the ground of waste, even if a majority of directors were not disinterested and independent. See In re Volcano Corp. S’holder Litig., C.A. No. 10485-VCMR. In this situation, the business judgment rule is “irrebutable” and dismissal is typically appropriate given the high bar for proving “waste” and the unlikelihood that a majority of informed stockholders would approve such a transaction. In re Volcano is the latest decision underscoring the critical importance of securing an uncoerced and fully informed majority vote of disinterested stockholders if boards wish to benefit from this extremely deferential standard of review.


In 2012, Volcano Corporation sought to raise capital through a $460 million convertible note offering. To mitigate the potentially dilutive effect that a conversion could have on common stockholders, Volcano entered into two hedging transactions with the two underwriters of the convertible note offering—one in which it paid the underwriters over $78 million for call options on Volcano’s common stock and another in which the underwriters paid Volcano over $46 million for warrants on the common stock. The options and warrants, which expired in late 2017 and mid-2018 respectively, also terminated upon a change of control of Volcano.

Then, in January 2014, the Volcano board began exploring potential strategic transactions. In July 2014, Philips Holding USA expressed interest in acquiring Volcano for $24 per share. The Volcano board agreed to explore the offer, retained one of the underwriters as a financial advisor to, among other things, perform a market check, and formed a special committee of independent directors to oversee the merger process. Negotiations ensued over several months—during which time Volcano’s stock price dropped and no other companies expressed interest—and the parties ultimately agreed to a cash-out merger pursuant to DGCL § 251(h), in which Philips would make a first-step tender offer for all of Volcano’s outstanding shares at $18 per share. The Volcano board unanimously approved the transaction and 89.1% of Volcano’s common stockholders tendered their shares. The call options and warrants were therefore terminated, requiring the counterparties to pay each other their fair market value, and as a result, as between Volcano and the underwriter/financial advisor, Volcano had to pay the financial advisor $24.6 million. In addition, the Volcano directors received $8.9 million as a result of the acceleration of stock options and restricted stock, and Volcano’s CEO was terminated without cause, entitling him to $7.1 million in benefits, including $3.1 million in cash. He was also engaged by the acquirer to provide consulting services for five months post-merger at total compensation of up to $500,000.

Three of Volcano’s stockholders challenged the merger on the ground that the Volcano directors, aided and abetted by the financial advisor, breached their fiduciary duties because they acted in an uninformed manner, relied on the “flawed advice” of the “highly conflicted financial advisor,” and were motivated to agree to the deal for their own economic gain. Vice Chancellor Montgomery-Reeves dismissed the stockholders’ claims on the pleadings, concluding that (i) a disinterested, fully informed and uncoerced majority of Volcano’s stockholders assented to the transaction by tendering their shares, thus insulating the transaction from review except on the ground of waste, which was not alleged; and (ii) nothing in the record came close to meeting the high burden of establishing that the financial advisor acted with the requisite scienter to support an aiding and abetting claim.


  • Under In re Volcano, two-step mergers will be insulated from review except on the ground of waste as long as a fully-informed and uncoerced majority of disinterested stockholders accept the first-step tender offer. In Corwin, the Delaware Supreme Court held that, “when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies,” even where their vote is statutorily required and the transaction would otherwise be subject to Revlon review. Corwin, 125 A.3d at 308-09. The Court reaffirmed this holding in Singh v. Attenborough,—A.3d—(Del. 2016), in which it made clear that a transaction that has been so approved “only can be challenged on the basis that it constituted waste.” The parties in In re Volcano disagreed as to whether a tender of shares by a majority of stockholders in a two-step merger under DGCL § 251 has the same “cleansing effect” as a stockholder vote.

Vice Chancellor Montgomery-Reeves held that it does. In so holding, she found that the Court’s reasoning in Corwin and Attenborough applies with equal force in the case of a two-step merger approved through stockholder acceptance of a tender offer because, inter alia, (i) target boards evaluating two-step mergers under DGCL § 251 are subject to the same common law fiduciary duties and obligations to negotiate, agree to and declare the advisability of the merger as their counterparts are in evaluating mergers that require a stockholder vote; (ii) first-step tender offers in a two-step merger are not inherently more coercive than a stockholder vote in a one-step merger because, among other things, the first-step tender offer must be made for all shares, the consideration paid in the second step must be “of the same amount and kind” that was paid in the first step, and non-tendering shareholders have appraisal rights; (iii) “[a] stockholder is no less exercising her ‘free and informed chance to decide on the economic merits of the transaction’ simply by virtue of accepting a tender offer rather than casting a vote”; and (iv) although the Supreme Court’s opinion in Corwin referred to a stockholder “vote” in favor of a transaction, “the Supreme Court, at times, uses the terms ‘approve’ and ‘vote’ interchangeably” and numerous decisions in Delaware “have equated stockholder acceptance of a tender offer with a stockholder vote in favor of a merger.”

  • In determining whether stockholders were fully informed, courts are unlikely to deny boards the benefit of the “cleansing” effect of a stockholder vote merely because the company’s disclosures failed to include details that would have made those disclosures only “somewhat more informative.” Here, it was undisputed that the stockholders were apprised of the fact that the financial advisor held warrants and that the value of those warrants decreased over time. The plaintiffs argued, however, that it was never disclosed that the warrants’ value decreased “exponentially,” and therefore, according to the plaintiffs, Volcano’s stockholders were not fully informed that “it was in [the financial advisor’s] direct financial interest that a change in control transaction, involving all or nearly all cash, be consummated as soon as possible, regardless of whether the transaction maximize[d] Volcano stockholder value.” The court disagreed, noting that the board had disclosed that, if the merger was announced at a later date, the value of the warrants would continue to decrease over time. “Based on that disclosure,” the court reasoned, “Volcano’s stockholders were aware that [the financial advisor’s] payout under the Warrants would have decreased if the Merger was consummated at a later date” and “[a] reasonable stockholder could infer from this information that, all else held equal, [the financial advisor] would have preferred to consummate a deal sooner rather than later.” The court concluded that, “although a more exhaustive disclosure of the Warrants’ value decay over time may have been ‘somewhat more informative,’ a reasonable stockholder would not have viewed that fact as significantly altering the total mix of available information regarding the relationship between [the financial advisor’s] interests in the [warrants] and the Merger.”
  • Assuming a fully-informed, uncoerced majority of disinterested stockholders tender their shares in a two-step merger under DGCL § 251(h), the merger is essentially “review proof,” as the standard for establishing “waste”—no rational business purpose for the transaction—is exceedingly difficult to meet and, logically, the fact that a majority of informed stockholders tendered their shares suggests that they saw a rational purpose for the merger and believed it to be fair. The court explained that, because a fully-informed, uncoerced majority of Volcano’s stockholders tendered their shares, the merger could only be challenged on the ground that it could not “be attributed to any rational business purpose.” The plaintiffs failed to plead that the merger constituted waste, but even if they had attempted to do so, the challenge likely would have failed because “‘it [is] logically difficult to conceptualize how a plaintiff can ultimately prove a waste or gift claim in the face of a decision by fully informed, uncoerced, independent stockholders to ratify the transaction,’ given that ‘[t]he test for waste is whether any person of ordinary sound business judgment could view the transaction as fair.'”
  • Notwithstanding the high bar for establishing scienter on an aiding and abetting claim, financial advisors and other gatekeepers should not interpret In re Volcano as insulating their conduct from review as long as the underlying transaction has been approved by the requisite vote or tender of a fully-informed, uncoerced majority of disinterested stockholders. The court dismissed the aiding and abetting claim against the financial advisor because nothing in the record reasonably suggested that it had acted with the requisite scienter. However, the Supreme Court in Attenborough sounded a cautionary note to financial advisors that is unchanged by In re Volcano: while the scienter standard for aiding and abetting is defendant-friendly for advisors, “an advisor whose bad-faith actions cause its board clients to breach their situational fiduciary duties … is liable for aiding and abetting,” and an “advisor is not absolved from liability simply because its clients’ actions were taken in good-faith reliance on misleading and incomplete advice tainted by the advisor’s own knowing disloyalty. To grant immunity to an advisor because its own clients were duped by it would be unprincipled and would allow corporate advisors a level of unaccountability afforded to no other professionals.”
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