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By Michael Greene
Dec. 22 — According to practitioners, when the Delaware Supreme Court reversed the chancery court and issued a Dec. 19 ruling that clarified a board of directors' duties under Revlon, the court showed that independent directors' decisions will receive great deference.
Practitioners told BBNA that the Supreme Court's decision is in line with prior precedent: boards do not have to actively shop for higher offers when selling a company, and the fact that the transaction is a tax inversion will not change the scope of a board's duties.
In November, the Delaware Chancery Court issued a preliminary injunction preventing C&J Energy Services, Inc. from proceeding with its $2.86 billion merger with a unit of Nabors Industries Ltd., designed to lower its tax liability. In addition to issuing the injunction, the lower court blue-penciled a mandatory “go-shop” provision into the merger agreement.
The high court, however, overturned the chancery court's decision, finding that C&J Energy's directors didn't have to shop for other offers and ruling that shareholders should be allowed to vote to determine whether the terms of the deal are value-maximizing.
There's no “specific route that a board must follow when fulfilling its fiduciary duties, and an independent board is entitled to use its business judgment to decide to enter into a strategic transaction that promises great benefit, even when it creates certain risks,” Chief Justice Leo Strine Jr. wrote for the court.
Jason M. Halper, a partner at Orrick, Herrington & Sutcliffe, LLP and co-chairman of his firm’s financial institutions litigation practice, told BBNA that one of the key takeaways from this decision is that in a sale of control situation, Revlon does not require an active market check.
He noted that the supreme court made clear that directors are required to provide an effective market check, which can be passive; in this case the board found that there was an effective market check because there was a five-month period where another bid could have emerged, the buyer had a “fiduciary out” and there was an informed board.
Halper also said that the high court was clearly troubled by how the chancery court approached this case. The chancery court issued the injunction without a formal written opinion and blue-penciled a go-shop provision into the merger agreement.
The high court viewed the chancery court as having stripped one of the parties of a negotiated contractual right despite not finding evidence of wrongdoing by that party, he said.
Edward M. McNally, a partner at Morris James, LLP, Wilmington, Del., told BBNA there are cases where the chancery court has approved parts of a transaction and ruled other parts invalid, and the supreme court has upheld those decisions. He said this case was much different, however, in that one of the parties of the instant transaction was not found to be involved in any wrongdoing.
Both Halper and McNally agreed that the supreme court found this re-writing of the contract to be unfair and inappropriate.
According to McNally, the supreme court's ruling was not particularly surprising. Under Chief Justice Strine, the Delaware Supreme Court has given a lot of weight to the judgment of independent directors, he said.
He added that consistent with those opinions in the past year, independent directors and proper procedural protections will increase the ability of boards to have their decisions upheld.
The Supreme Court took pain to cite precedent in showing that Revlon never required the kind of active market check the lower court thought was necessary, said Halper. Particularly, the supreme court emphasized that Revlon, QVC and other cases like it arose in very different situations.
This case reaffirms that there are many ways that boards can discharge their duties in selling a company, Morton Pierce, a partner at White & Case, LLP, told BBNA. He added that this principle has been consistent throughout Delaware case law.
The fact that the transaction at issue was a tax inversion may have been a reason the courts viewed this case differently, according to McNally. Accordingly, the lower court's decision may have been a byproduct of the unusual and novel factual setting, he said.
Halper noted that the supreme court fundamentally rejected the lower court's view that the board didn't realize that it was in sale situation, he said.
When asked about the effect this case could have on challenges to tax inversion transactions in the future, Halper said this case indicates, not surprisingly, that the tax advantages associated with an inversion are a legitimate business reason for a board to consider in pursuing a transaction.
The fact that it is a tax inversion deal will not make a difference in how the transaction is reviewed, McNally stated. Pierce echoed this sentiment, saying the same basic Revlon principle will apply to tax inversion deals.
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The opinion is available at http://www.bloomberglaw.com/public/document/CJ_Energy_Servs_Inc_v_City_of_Miami_Gen_Emps__Sanitation_Emps_Ret.
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