Clarity on the “Quasi-Appraisal” Remedy and Post-Closing Claims

On May 11, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery issued another noteworthy opinion, dismissing with prejudice post-closing merger claims in In re Cyan, Inc. Stockholders Litigation. [1] The case arose out of the August 2015 acquisition of Cyan, Inc., a networking solutions company, by Ciena Corporation through a mostly stock-for-stock transaction, consisting of 89 percent stock and 11 percent cash. Before the deal closed, shareholder plaintiffs filed five lawsuits in the Court of Chancery, which were later consolidated. The plaintiffs did not seek expedited injunctive relief; rather, they elected to pursue damages for their process and disclosure claims post-closing. Specifically, the plaintiffs’ amended complaint asserted two counts for: (1) breach of fiduciary duty against Cyan’s seven-member board in connection with approval of the merger; and (2) equitable relief in the form of “quasi-appraisal.”

There are three main takeaways from the decision. First, this decision is yet another example of the Court of Chancery’s application of the rule announced by the Delaware Supreme Court in Corwin v. KKR Financial Holdings LLC, [2] which held that the business judgment rule is the standard of review when a fully-informed, uncoerced vote of disinterested stockholders approves a transaction. Second, the decision demonstrates that if plaintiffs wish to bring disclosure claims post-closing, they will have to be able to identify actual material omissions, and not merely plead laundry lists of disclosure violations that are not material or that are of the “tell me more” variety. And finally, the Court of Chancery made clear that “quasi-appraisal” is a remedy for a breach of fiduciary duty and that “artful pleading” is not a viable path to circumvent exculpation from monetary liability provided to directors by 8 Del. C. § 102(b)(7).

The court dismissed Count One on two alternative grounds. First, the court held that the plaintiffs failed to plead a non-exculpated breach of fiduciary duty. Observing that enhanced scrutiny under Revlon did not apply to the mostly stock-for-stock transaction, the court’s analysis turned on whether the plaintiffs pled that a majority of the board was interested or acted in bad faith. The court rejected the plaintiffs’ argument that the directors were conflicted because they allegedly harbored a desire to find a buyer with “deep pockets” to ensure they would not be personally liable in the event of an adverse judgment in an unrelated pending securities class action. The court concluded this theory was doomed because it was based on the factually erroneous premise that, among other things, the directors faced significant exposure in the securities action and were not adequately protected by existing indemnification obligations and D&O insurance. The court also rejected the argument that three of the directors were motivated by a desire to receive make-whole payments triggered by the merger from certain convertible notes they held, because these same directors also had significant Cyan stock holdings, and in any event, were not a majority of the seven-member board. Finally, the court held that it was not bad faith to have rejected a demand from the plaintiffs to supplement the proxy in July 2015, shortly before the scheduled stockholder vote where that letter alleged disclosure deficiencies that were not material.

The Court of Chancery also dismissed Count One on the alternate ground that the fully informed, uncoerced vote of 98 percent of voting Cyan stockholders in favor of the merger invoked the protection of the business judgment rule, citing Corwin. In doing so, the court examined the plaintiffs’ “three strongest disclosure claims”—which the court requested plaintiffs’ counsel identify shortly before oral argument on the motion to dismiss—and found none to have been material. The court rejected the plaintiffs’ claim that the proxy failed to disclose adequately Cyan’s dependence on its largest customer because the proxy did disclose this fact in detail, including by incorporating by reference extensive prior disclosures concerning that customer in Cyan’s SEC filings. Recognizing that documents incorporated by reference can be part of the “total mix of information available to stockholders,” the court held that this was a case where such incorporation was appropriate, as “the language incorporating the Form 10-K and Form 10-Q appears in a section of the Proxy where stockholders reasonably could expect to find the relevant information, and … the information was conspicuously laid out in the incorporated documents so that a reasonable stockholder reading the Proxy could find it without difficulty.” [3]

Finally, the Court of Chancery dismissed the plaintiffs’ “claim for equitable relief” seeking the “remedy of quasi-appraisal” based on the disclosure allegations in the complaint. Citing In re Orchard Enterprises, Inc. Stockholder Litigation, [4] the court first reiterated that “quasi-appraisal” is a remedy that may be appropriate when a fiduciary duty breach is based on disclosure violations. Further, despite the plaintiffs’ characterization of the cause of action as “frustration of the statutory right of appraisal,” the court observed that the underlying cause of action was, in substance, breach of the fiduciary duty of disclosure. Because the court had already rejected the plaintiffs’ disclosure claims and concluded that the plaintiffs failed to allege a non-exculpated breach of fiduciary duty, Count Two was barred by Cyan’s exculpatory charter provision adopted pursuant to Section 102(b)(7). The court held, “When the cause of action supporting plaintiffs’ request for a quasi-appraisal remedy is for breach of a fiduciary duty, plaintiffs cannot circumvent the protection afforded in Cyan’s certificate of incorporation through artful pleading.” [5]

Endnotes

1C.A. No. 11027-CB, mem. op. (Del. Ch. May 11, 2017). Wilson Sonsini Goodrich & Rosati represented the Cyan board of directors in the matter.(go back)

2125 A.3d 304 (Del. 2015).(go back)

3Mem. Op. at 35.(go back)

488 A.3d 1 (Del. Ch. 2014).(go back)

5Mem. Op. at 42-43.(go back)