In Re Merge Healthcare Inc. Stockholder Litigation
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
) ) ) IN RE MERGE HEALTHCARE INC. ) STOCKHOLDERS LITIGATION ) Consol. C.A. No. 11388-VCG ) ) ) )
MEMORANDUM OPINION
Date Submitted: October 11, 2016 Date Decided: January 30, 2017
Seth D. Rigrodksy, Brian D. Long, Gina M. Serra, Jeremy J. Riley, of RIGRODSKY & LONG, P.A., Wilmington, Delaware; James R. Banko, Derrick B. Farrell, of FARUQI & FARUQI, LLP, Wilmington, Delaware; OF COUNSEL: Nadeem Faruqi, of FARUQI & FARUQI, LLP, New York, New York; Juan E. Monteverde, of MONTEVERDE & ASSOCIATES PC, New York, New York, Attorneys for Plaintiffs.
David J. Teklits, D. McKinley Measley, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Howard S. Suskin, of JENNER & BLOCK LLP, Chicago, Illinois, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor This litigation involves the acquisition of Merge Healthcare, Inc. (“Merge” or
the “Company”) by IBM (the “Merger”). The matter is before me on the
Defendants’ motion to dismiss. The Merger was supported by a vote of close to
80% of Merge stockholders. The Plaintiffs, former Merge stockholders, seek post-
closing damages against the Company’s directors for what the Plaintiffs allege was
an improper sale process. Such damages are typically problematic, because they
require a demonstration that the directors breached the duty of loyalty, a rather
difficult target for a plaintiff to hit. Here, however, Merge has chosen to forgo an
exculpation clause in its corporate charter. Therefore, the Director Defendants are
exposed to liability for acts violative of their duty of care, in the context of what the
Complaint describes as a less-than-rigorous sales process. Demonstrating such a
violation is not trivial: it requires a demonstration of gross negligence. Nonetheless,
it is less formidable than showing disloyalty.
Before considering whether the Complaint states a claim for fiduciary duty
violations, however, I must first consider whether the vote of a majority of
disinterested shares in favor of the Merger serves to cleanse any such violations,
raising the presumption that the Directors acted within their proper business
judgment. The vote here will have such an effect, 1 but only if it was uncoerced and
1 Leaving only, theoretically, liability for waste, which is not alleged here. The carve-out for waste is an interesting judicial construct; it is difficult to envision a majority vote in favor of a transaction so unfavorable as to constitute waste. The hoary doctrine of waste is best viewed here as a kind
1 fully informed. I find that such is the case; therefore, the motion to dismiss is
granted. My reasoning follows.
I. BACKGROUND2
A. The Parties
The Plaintiffs are the owners of Merge common stock and have been
continuously throughout all relevant times. 3 The Complaint lists the entire Merge
Board as the Defendants, consisting of Michael Ferro, Justin Dearborn, William J.
Devers, Neele E. Stearns Jr., Michael P. Cole, Matthew M. Maloney, and Richard
A. Reck.
Defendant Ferro served as Chairman of the Board of the Company from June
2008 to August 2013 and from November 21, 2014 until the Merger. 4 Ferro was the
founder and CEO of Click Commerce, Inc. (“Click”), which he sold in 2006. 5 That
same year, Ferro started Merrick Ventures LLC (“Merrick”), where he is currently
the Chairman and CEO. 6 At the close of the Merger, Ferro, through Merrick,
received $188 million in “immediate liquidity.” 7
of “judicial out,” a way around the strictures of the cleansing rule given a fact situation of some undefined level of egregiousness, such that equity would intervene. 2 The facts, drawn from Plaintiffs’ Verified Consolidated Amended Class Action Complaint (the “Complaint”), judicially noticeable facts in publicly available SEC filings, and from documents incorporated by reference therein, are presumed true for purposes of evaluating Defendants’ Motion to Dismiss. 3 Compl. ¶ 28. 4 Id. at ¶ 30. 5 Id. at ¶¶ 4, 30. 6 Id. at ¶¶ 4, 30. 7 Id. at ¶¶ 30, 71.
2 Defendant Dearborn “served as the Company’s President, CEO, Corporate
Secretary and Director of the Board at all relevant times.” 8 Ferro appointed
Dearborn to the Board of the Company in 2008. 9 Dearborn and Ferro worked
together at Click for nine years before its sale in 2006. Dearborn has also spent time
as the Managing Director and General Counsel of Merrick, Ferro’s LLC. 10
Defendant Devers served on the Board of the Company from February 2014
until the close of the Merger.11 Devers also served as a director of Click until its sale
in 2006.12 After the sale of Click, Devers joined the board of Merrick.13 He was
also previously employed by IBM.14 Devers received over $3.8 million in
immediate liquidity upon the close of the Merger.15
Defendant Stearns served on the Board of the Company from June 2008 until
the close of the Merger. 16 He also served as the Chairman of the Audit Committee
and as a member of both the Compensation and Executive Committees. 17 Stearns
8 Id. at ¶ 31. 9 Id. 10 Id. 11 Id. at ¶ 32. 12 Id. 13 Id. 14 Id. 15 Id. at ¶ 17. 16 Id. at ¶ 33. 17 Id.
3 also served as a director of Click “until its sale in 2006.”18 Stearns received over
$5.9 million in immediate liquidity upon the close of the Merger. 19
Defendant Cole served on the Board of the Company from April 23, 2015
until the close of the Merger. 20 Cole also served with Ferro on the boards of Big
Shoulders Fund and Lyric Opera of Chicago. 21
Defendant Maloney served on the Board of the Company from August 2012
until the close of the Merger. 22 Maloney received over $1.62 million in immediate
liquidity upon the close of the Merger. 23
Defendant Reck served on the Board of the Company from April 2003 until
the close of the Merger.24 Reck owned approximately 4,000 shares of IBM before
the close of the Merger, a fact he did not disclose until the day before the Board
approved the Merger Agreement. 25 Reck and Ferro have known each other for
approximately twenty years.26 Reck received over $5.4 million in immediate
liquidity upon the close of the Merger. 27
18 Id. at ¶ 33. 19 Id. at ¶ 17. 20 Id. at ¶ 34. 21 Id. 22 Id. at ¶ 35. 23 Id. at ¶ 17. 24 Id. at ¶ 36. 25 Id. 26 Id. 27 Id. at ¶ 17.
4 B. Relevant Non-parties
Non-party Merge Healthcare, Inc. was a Delaware corporation with its
principal offices in Chicago, Illinois.28 The Company’s business was the
development of healthcare software.29 Previous Defendant but now non-party
Goldman, Sachs & Co. (“Goldman”) is an investment bank that was retained by the
Company to provide financial advice in connection with its possible sale. 30 Non-
party IBM is a New York corporation that provides information technology products
and services.31 Non-party Datong Acquisition Corp. (“Merger Sub”) is a Delaware
corporation and a wholly owned subsidiary of IBM.32 Merger Sub was merged with
and into Merge and ceased its corporate existence upon the completion of the
Merger.33
C. Factual Overview
The Plaintiffs brought this class action on behalf of themselves and other
public stockholders of the Company for damages resulting from IBM’s acquisition
of the publicly owned shares of the Company. 34 On August 6, 2015, the Company’s
Board of Directors entered the Company into an Agreement and Plan of Merger (the
28 Id. at ¶ 29. 29 Id.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
) ) ) IN RE MERGE HEALTHCARE INC. ) STOCKHOLDERS LITIGATION ) Consol. C.A. No. 11388-VCG ) ) ) )
MEMORANDUM OPINION
Date Submitted: October 11, 2016 Date Decided: January 30, 2017
Seth D. Rigrodksy, Brian D. Long, Gina M. Serra, Jeremy J. Riley, of RIGRODSKY & LONG, P.A., Wilmington, Delaware; James R. Banko, Derrick B. Farrell, of FARUQI & FARUQI, LLP, Wilmington, Delaware; OF COUNSEL: Nadeem Faruqi, of FARUQI & FARUQI, LLP, New York, New York; Juan E. Monteverde, of MONTEVERDE & ASSOCIATES PC, New York, New York, Attorneys for Plaintiffs.
David J. Teklits, D. McKinley Measley, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Howard S. Suskin, of JENNER & BLOCK LLP, Chicago, Illinois, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor This litigation involves the acquisition of Merge Healthcare, Inc. (“Merge” or
the “Company”) by IBM (the “Merger”). The matter is before me on the
Defendants’ motion to dismiss. The Merger was supported by a vote of close to
80% of Merge stockholders. The Plaintiffs, former Merge stockholders, seek post-
closing damages against the Company’s directors for what the Plaintiffs allege was
an improper sale process. Such damages are typically problematic, because they
require a demonstration that the directors breached the duty of loyalty, a rather
difficult target for a plaintiff to hit. Here, however, Merge has chosen to forgo an
exculpation clause in its corporate charter. Therefore, the Director Defendants are
exposed to liability for acts violative of their duty of care, in the context of what the
Complaint describes as a less-than-rigorous sales process. Demonstrating such a
violation is not trivial: it requires a demonstration of gross negligence. Nonetheless,
it is less formidable than showing disloyalty.
Before considering whether the Complaint states a claim for fiduciary duty
violations, however, I must first consider whether the vote of a majority of
disinterested shares in favor of the Merger serves to cleanse any such violations,
raising the presumption that the Directors acted within their proper business
judgment. The vote here will have such an effect, 1 but only if it was uncoerced and
1 Leaving only, theoretically, liability for waste, which is not alleged here. The carve-out for waste is an interesting judicial construct; it is difficult to envision a majority vote in favor of a transaction so unfavorable as to constitute waste. The hoary doctrine of waste is best viewed here as a kind
1 fully informed. I find that such is the case; therefore, the motion to dismiss is
granted. My reasoning follows.
I. BACKGROUND2
A. The Parties
The Plaintiffs are the owners of Merge common stock and have been
continuously throughout all relevant times. 3 The Complaint lists the entire Merge
Board as the Defendants, consisting of Michael Ferro, Justin Dearborn, William J.
Devers, Neele E. Stearns Jr., Michael P. Cole, Matthew M. Maloney, and Richard
A. Reck.
Defendant Ferro served as Chairman of the Board of the Company from June
2008 to August 2013 and from November 21, 2014 until the Merger. 4 Ferro was the
founder and CEO of Click Commerce, Inc. (“Click”), which he sold in 2006. 5 That
same year, Ferro started Merrick Ventures LLC (“Merrick”), where he is currently
the Chairman and CEO. 6 At the close of the Merger, Ferro, through Merrick,
received $188 million in “immediate liquidity.” 7
of “judicial out,” a way around the strictures of the cleansing rule given a fact situation of some undefined level of egregiousness, such that equity would intervene. 2 The facts, drawn from Plaintiffs’ Verified Consolidated Amended Class Action Complaint (the “Complaint”), judicially noticeable facts in publicly available SEC filings, and from documents incorporated by reference therein, are presumed true for purposes of evaluating Defendants’ Motion to Dismiss. 3 Compl. ¶ 28. 4 Id. at ¶ 30. 5 Id. at ¶¶ 4, 30. 6 Id. at ¶¶ 4, 30. 7 Id. at ¶¶ 30, 71.
2 Defendant Dearborn “served as the Company’s President, CEO, Corporate
Secretary and Director of the Board at all relevant times.” 8 Ferro appointed
Dearborn to the Board of the Company in 2008. 9 Dearborn and Ferro worked
together at Click for nine years before its sale in 2006. Dearborn has also spent time
as the Managing Director and General Counsel of Merrick, Ferro’s LLC. 10
Defendant Devers served on the Board of the Company from February 2014
until the close of the Merger.11 Devers also served as a director of Click until its sale
in 2006.12 After the sale of Click, Devers joined the board of Merrick.13 He was
also previously employed by IBM.14 Devers received over $3.8 million in
immediate liquidity upon the close of the Merger.15
Defendant Stearns served on the Board of the Company from June 2008 until
the close of the Merger. 16 He also served as the Chairman of the Audit Committee
and as a member of both the Compensation and Executive Committees. 17 Stearns
8 Id. at ¶ 31. 9 Id. 10 Id. 11 Id. at ¶ 32. 12 Id. 13 Id. 14 Id. 15 Id. at ¶ 17. 16 Id. at ¶ 33. 17 Id.
3 also served as a director of Click “until its sale in 2006.”18 Stearns received over
$5.9 million in immediate liquidity upon the close of the Merger. 19
Defendant Cole served on the Board of the Company from April 23, 2015
until the close of the Merger. 20 Cole also served with Ferro on the boards of Big
Shoulders Fund and Lyric Opera of Chicago. 21
Defendant Maloney served on the Board of the Company from August 2012
until the close of the Merger. 22 Maloney received over $1.62 million in immediate
liquidity upon the close of the Merger. 23
Defendant Reck served on the Board of the Company from April 2003 until
the close of the Merger.24 Reck owned approximately 4,000 shares of IBM before
the close of the Merger, a fact he did not disclose until the day before the Board
approved the Merger Agreement. 25 Reck and Ferro have known each other for
approximately twenty years.26 Reck received over $5.4 million in immediate
liquidity upon the close of the Merger. 27
18 Id. at ¶ 33. 19 Id. at ¶ 17. 20 Id. at ¶ 34. 21 Id. 22 Id. at ¶ 35. 23 Id. at ¶ 17. 24 Id. at ¶ 36. 25 Id. 26 Id. 27 Id. at ¶ 17.
4 B. Relevant Non-parties
Non-party Merge Healthcare, Inc. was a Delaware corporation with its
principal offices in Chicago, Illinois.28 The Company’s business was the
development of healthcare software.29 Previous Defendant but now non-party
Goldman, Sachs & Co. (“Goldman”) is an investment bank that was retained by the
Company to provide financial advice in connection with its possible sale. 30 Non-
party IBM is a New York corporation that provides information technology products
and services.31 Non-party Datong Acquisition Corp. (“Merger Sub”) is a Delaware
corporation and a wholly owned subsidiary of IBM.32 Merger Sub was merged with
and into Merge and ceased its corporate existence upon the completion of the
Merger.33
C. Factual Overview
The Plaintiffs brought this class action on behalf of themselves and other
public stockholders of the Company for damages resulting from IBM’s acquisition
of the publicly owned shares of the Company. 34 On August 6, 2015, the Company’s
Board of Directors entered the Company into an Agreement and Plan of Merger (the
28 Id. at ¶ 29. 29 Id. 30 Id. Goldman was dismissed from this action without prejudice on June 9, 2016. 31 Compl. ¶ 38. 32 Id. at ¶ 39. 33 Id. 34 Id. at ¶ 1.
5 “Merger Agreement”) pursuant to which the Company’s common stockholders
received $7.13 in cash for each of their shares, which represented a 31.8% premium
to the closing price of $5.41 per share of the Company’s common stock on August
5, 2015.35 The holders of the Company’s Series A Convertible Preferred Stock
received $1,500 in cash for each of their shares of Preferred Stock. 36 The Merger
was completed on October 13, 2015 at an approximate value of $1 billion. 37 77.3%
of the Company’s outstanding shares were voted in favor of the Merger.38 As part
of the Merger, certain members of Company management entered into employment
or transition arrangements with IBM, including one of the Defendants, Dearborn.39
1. Ferro’s Journey
As a reminder, Ferro started serving as Chairman of the Board in 2008.40
Ferro is also Chairman and CEO of Merrick, which in May 2008 “bought a
controlling interest in Merge by paying $5 million and making a $15 million loan,
which was repaid in 2009.” 41 At that time, Ferro, through Merrick, owned 50.1% of
the Company. 42 Merrick started selling off its shares in 2009, holding 38.1% at the
35 Id. at ¶ 2; Defs’ Opening Br., Transmittal Aff. of D. McKinley Measley, Esq., Ex. 3, Merge Healthcare, Inc. Definitive Proxy Statement at 32 (Sept. 11, 2015) (the “Proxy”). 36 Compl. ¶ 2. 37 Id. 38 Defs’ Opening Br., Transmittal Aff. of D. McKinley Measley, Esq., Ex. 6, 10/14/2015 Merge Form 8-K at 2. 39 Compl. ¶ 7. 40 Id. at ¶ 30. 41 Id. 42 Id. at ¶ 70.
6 end of 2010 and 26.62% as of August 26, 2015. 43 The Company’s December 31,
2014 10-K states
Mr. Ferro indirectly owns or controls all of the shares of our common stock owned by Merrick Ventures and Merrick Holdings. Due to their stock ownership, Merrick Ventures and Merrick Holdings have significant influence over our business, including the election of our directors. . . . Merrick Ventures’ and Merrick Holdings’ significant ownership of our voting stock will enable it to influence or effectively control us and the influence of our large stockholders could impact our business strategy and also have the effect of discouraging others from purchasing or attempting to take a control position in our common stock, thereby increasing the likelihood that the market price of our common stock will not reflect a premium for control. 44
Ferro resigned from Merge’s Board in August 2013 due to health reasons but
rejoined in November 2014 and was appointed Chairman. 45
2. The Consulting Agreement
Merrick had a consulting agreement with the Company that had expired on
December 31, 2013.46 On May 29, 2015, “instead of a compensation package for
Ferro,”47 the Company approved an amended consulting agreement between the
Company, Ferro, and Merrick (the “Consulting Agreement”).48 Under the
Consulting Agreement, “Merrick agreed to provide services to the Company that
43 Id. 44 Id. at ¶ 69 (emphasis in original). Merrick owned 26.9% of Merge common stock as of December 31, 2014. Id. at ¶ 70. 45 Id. at ¶¶ 72–73. 46 Id. at ¶ 79. 47 Proxy at 20. 48 Compl. ¶ 80.
7 included product development and strategic planning” and “the Company agreed to
reimburse Merrick’s expenses related to” those services. 49 Most notably, the Board
agreed that the Company would pay Merrick a one-time fee of $15 million in cash
if the Company consummated a strategic transaction “at an aggregate enterprise
value of at least $1 billion” (the “Consulting Agreement Fee”).50
3. The Sale to IBM
Since 2012, the Company has reviewed its strategic alternatives and met with
potential financial and strategic acquirors.51 In 2013 into early 2014, the Company
received interest in possible acquisitions of or investments in “certain of [their]
businesses or [the] Company as a whole,” but the Company did not receive “any
concrete proposals” that senior management and the Board believed “represented an
attractive price . . . or would significantly increase stockholder value.” 52 In October
2014, Dearborn met with a potential financial investor, Party A, and the Company
entered into a confidentiality agreement with Party A one month later.53 Party A
expressed interest at $2.60 per share during a month when the Company’s common
49 Id. 50 Id. 51 Proxy at 19. 52 Id. 53 Id.
8 stock traded in a range of $2.76 to $3.40 per share.54 The Company determined it
could not reach an agreement with Party A. 55
In early 2015, Ferro and senior management developed a business strategy
code-named “eMed” that “would utilize the Company’s access to medical diagnostic
images and the availability of cheaper and faster computing and artificial
intelligence capabilities to develop a new business line for the Company.”56 Ferro
sought investors and potential business partners for the eMed idea, reaching out to
several industry participants, including IBM.57
Ferro, Jon Devries, a Vice President in the Company, and Dearborn met with
IBM representatives and discussed the eMed idea at an industry conference on April
13, 2015.58 In May 2015, IBM expressed an interest in acquiring Merge.59 On July
7, 2015, IBM “submitted an exclusivity agreement” reflecting a proposed offer of
$5.65 per share in cash that was conditioned on an exclusivity agreement and
employment and retention arrangements with certain members of the Company’s
management.60 After meeting on July 9, 2015, the Board told Ferro and Dearborn
to convey to IBM that it was unwilling to enter into an exclusivity agreement at the
54 Id. 55 Id. 56 Compl. ¶ 74. 57 Compl. ¶ 76; Proxy at 20. 58 Compl. ¶ 78; Proxy at 20. 59 Compl. ¶ 78. 60 Id. at ¶ 81.
9 proposed price of $5.65. 61 The Board also authorized Ferro and Dearborn to enter
into an “appropriate” exclusivity agreement if IBM raised its proposed purchase
price in such a way “that better reflected [the Board’s] view of [the Company’s]
value. . . .”62 Accordingly, “on July 10, 2015, Ferro and Dearborn entered Merge
into an exclusivity agreement with IBM at a proposed purchase price of $1 billion,
or $7.00 per share.”63 The exclusivity agreement would last until August 27, 2015.64
The Board met on July 14, 2015 and reviewed the interest levels of other potential
buyers.65 Company counsel also reviewed the directors’ fiduciary duties.66 During
the week of July 24, 2015, legal counsel to IBM, Merge, and Ferro/Merrick began
negotiating terms of a merger agreement. 67 Also during this week, the Board, senior
management, and Company counsel discussed forming a special committee “that
would not include Ferro to negotiate the Merger with IBM in light of the payment
that would become due under the [Consulting Agreement].”68 Ultimately, the Board
declined to form such a committee, an act the Plaintiffs allege was against the wishes
of counsel.69 On July 29, 2015, “Ferro suggested that if IBM were willing to increase
61 Proxy at 21. 62 Id. 63 Compl. ¶ 83. 64 Proxy at 22. 65 Compl. ¶ 84. 66 Proxy at 22. 67 Compl. ¶ 85. 68 Id. at ¶ 89 (emphasis added). 69 Id.
10 its offer price, Merrick would consider waiving” the $15 million Consulting
Agreement Fee.70 IBM obliged, increasing its offer from $7.00 to the final deal price
of $7.13 per share, representing a $15 million increase, and Ferro agreed to waive
the $15 million consulting fee if the Company entered into the Merger with IBM. 71
The Board met on August 5, 2015 to consider and vote on IBM’s proposal, if
appropriate.72 Goldman presented a fairness opinion to the Board stating that the
$7.13 per share offer was “fair from a financial point of view.” 73 Company counsel
reviewed the terms of the Merger Agreement with the Board, as well as the Board’s
fiduciary duties yet again.74 After “further review and discussion,” the Board
“resolved to approve” the Merger Agreement and recommend that the Company
stockholders approve the Merger Agreement. 75 Dearborn recused himself from the
vote due to negotiating post-closing employment with IBM.76 The Board caused the
Company to enter into the Merger Agreement on August 6, 2015, and the Merger
was completed on October 13, 2015.77 77.3% of the Company’s outstanding shares
70 Id. at ¶ 90. 71 Id. at ¶¶ 90–91. 72 Proxy at 24. 73 Id. 74 Id. at 25. 75 Id. 76 Id. 77 Compl. ¶ 2.
11 were voted in favor of the Merger.78 The Defendants filed a definitive proxy
statement in connection with the Merger.79
4. The Deal Protections
The Merger Agreement included certain deal protections. 80 A “no-
solicitation” provision prohibited the Company from shopping itself. 81 An
“information rights” provision required the Company to notify IBM within twenty-
four hours upon the receipt of an inquiry from an unsolicited bidder that may lead to
a superior proposal.82 The Board retained the right to change its recommendation in
connection with a superior proposal if the Board determined in good faith that the
failure to do so would be reasonably likely to result in a breach of the Board’s
fiduciary duties.83 However, a “force-the-vote” provision required the Board to
submit the Merger to a stockholder vote even if the Board no longer recommended
the Merger or even recommended against it. 84 Also, a “matching rights” provision
gave IBM five business days to match any superior proposal. 85 Finally, the Merger
78 Defs’ Opening Br., Transmittal Aff. of D. McKinley Measley, Esq., Ex. 6, 10/14/2015 Merge Form 8-K at 2. 79 Compl ¶ 117. 80 Id. at ¶ 22. 81 Id. During negotiations, IBM consistently refused to allow a go-shop provision. Proxy at 23. 82 Compl. ¶ 22. 83 Proxy at 27. 84 Compl. ¶ 110. 85 Id. at ¶ 22.
12 Agreement included a termination fee of up to $26 million, which would be paid to
IBM “if the Company terminated the Merger Agreement to pursue another offer.”86
5. Goldman’s Fairness Opinion
In conducting its fairness opinion, Goldman relied on financial projections
created by Company management for the purpose of evaluating the Merger.87 As
part of its analysis, Goldman valued the Company’s Net Operating Losses (“NOLs”)
at $0.59 per share, treated stock-based compensation (“SBC”) as a cash expense, and
used an unadjusted historical beta for the Company of 1.38. 88 Goldman has done
business with IBM and disclosed the extent of these past dealings on August 5,
2015—one day before the Company entered into the Merger Agreement. 89 Goldman
also earned $13 million from its engagement, “all of which was contingent upon the
consummation of the Merger.”90
D. Procedural History of the Consolidated Action
This Memorandum Opinion addresses five related actions that have been
consolidated.
86 Id. 87 Id. at ¶ 101. 88 Id. at ¶ 102. But see Pls’ Answering Br. 25–26 (alleging that Goldman did not use managements’ projections referred to in the Proxy that treated SBC as a cash expense but instead used a set of UFCF projections that did not treat SBC as a cash expense). 89 Compl. ¶ 14, 99. 90 Compl. ¶ 15.
13 The initial plaintiff filed his original Verified Class Action Complaint on
August 13, 2015, just one week after the Board announced the Merger, seeking to
enjoin the Merger. On September 18, 2015, the Defendants moved to dismiss or
stay this matter pending the completion of a related matter in Illinois also seeking to
enjoin the Merger (the “Illinois Action”).91 On September 30, 2015, the initial
plaintiff, along with four other plaintiffs in related Delaware actions, moved to
consolidate and appoint lead counsel, which I granted on October 6, 2015. I heard
argument on Defendants’ Motion to Dismiss or Stay this action in favor of the
Illinois Action on October 27, 2015, after which I denied Defendants’ Motion.
On November 19, 2015, the Plaintiffs moved for leave to file an amended
complaint. On December 4, 2015, the Defendants moved to proceed in one
jurisdiction and to dismiss or stay in the other jurisdiction, asking this Court and the
Illinois Court to confer and decide the appropriate forum for the litigation.
Thereafter, the matter moved forward here.
I granted Plaintiffs’ motion for leave to file an amended complaint on January
7, 2016 and the Plaintiffs filed their Verified Consolidated Amended Class Action
Complaint (the “Complaint”) on February 8, 2016. Count I is a claim for breach of
fiduciary duties against the Defendants.92 The Plaintiffs allege that the Defendants
91 See Hazen v. Merge Healthcare, Inc., No. 2015-CH-12090 (Ill. Cir. Ct.). 92 Id. at ¶¶ 137–144.
14 have violated their “duties of care, loyalty, and independence” to the Company’s
stockholders by putting their personal interests first, entering into the Merger
through an unfair process, and depriving stockholders of the “true value inherent in
and arising from” the Company.93 Count II is a claim for breach of the fiduciary
duty of disclosure against the Defendants in which the Plaintiffs allege that the
Defendants, acting in bad faith, “caused materially misleading and incomplete
information to be disseminated” to the stockholders and that the Proxy failed to
disclose material information.94 Count III was a claim for aiding and abetting
breaches of fiduciary duty against Goldman, which has since been withdrawn. The
Plaintiffs seek a quasi-appraisal remedy and compensatory damages. The
Defendants moved to dismiss on February 19, 2016 under Court of Chancery Rule
12(b)(6) for failure to state a claim. I heard oral argument on the Motion to Dismiss
on September 27, 2016, after which the parties completed supplemental briefing.
This Memorandum Opinion addresses Defendants’ motion.
II. ANALYSIS
The Defendants move to dismiss the Complaint pursuant to Court of Chancery
Rule 12(b)(6). When evaluating a motion to dismiss under 12(b)(6), the Court
accepts well-pleaded factual allegations as true, drawing all reasonable inferences in
93 Id. 94 Id. at ¶¶ 145–149.
15 favor of the plaintiff. 95 The Court must deny the motion unless “the plaintiff could
not recover under any reasonably conceivable set of circumstances susceptible of
proof.”96 Moreover, the Defendants here rely on the cleansing effect of the
stockholders’ vote ratifying the transaction. To the extent the Plaintiff has alleged
that the vote was uninformed, the Defendants bear the burden to show that the
deficiencies alleged are spurious or immaterial as a matter of law.97
The Plaintiffs argue that the entire fairness standard of review applies to the
Merger because a majority of the Merge board was conflicted. 98 The Plaintiffs
contend that this conflict stems from “Ferro’s desire to exit his Merge investment”
and that all but one member of the Board was beholden to Ferro through their
relationships with him.99 The Plaintiffs also argue that these relationships with other
Board members combined with Ferro’s 26% stock ownership allowed him to control
the Company.100 Because I find that a fully informed, uncoerced vote of the
Company’s disinterested stockholders cleansed the Merger here, resulting in the
application of the business judgment rule, I need not conduct an entire fairness
analysis. To be clear, the Plaintiffs assert two related sources of injury—price and
95 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536 (Del. 2011). 96 Id. 97 See In re Solera Holdings, Inc. Stockholder Litig., 2017 WL 57839, at *8 (Del. Ch. Jan. 5, 2017). 98 Pls’ Answering Br. 40. 99 Id. at 40–41. 100 Id. at 41–43.
16 process claims arising from the merger, and disclosure-inadequacy claims that
allegedly misled stockholders into voting for the merger and forgoing appraisal
rights; the former are cleansed, and the latter mooted, by a finding of adequate
disclosures to stockholders.
A. The Stockholder Vote Cleansed the Merger
Here, even if the stock affiliated with Ferro is taken from the calculation, a
majority of the stock held by disinterested stockholders voted for the Merger. It is
worth, I think, examining the rationale whereby such a vote—if uncoerced and
informed—cleanses price and process claims in the merger context. Why should the
Court dismiss a case where a sub-optimal sales process is credibly alleged?
The common law of Delaware, generally speaking, supports property rights
and private ordering, whereby assets may be assigned to highest use. Thus, in the
context of an individually-owned asset, the parties are free to negotiate a sales price
without Court oversight; such self-ordering is so ingrained that the very idea of
interference in such an exchange is largely unexamined. The common law of
corporations concerns itself with such exchanges because of agency problems:
where directors sell a corporate asset, ownership and control—and, potentially,
interests—diverge; and the presence of a judicial referee is necessary to watch the
watchmen. Thus, in the merger context, the Court will examine, 101 post-closing, the
101 Assuming an adequate complaint.
17 compliance of the directors with their fiduciary duties in regard to the sale, duties
themselves imposed to cure the agency problem described above. However, where
a majority of the disinterested ownership of the corporate asset approves the
transaction, in a manner both uncoerced and informed, the agent/principal conflict
with directors is ameliorated, and the need for judicial oversight of the agents is
reduced concomitantly.102 Of course, another agency relationship, the majority
dragging along the minority, remains; however, because the interests of the
unaffiliated stockholders tend to be aligned, that relationship is less problematic, and
is addressed statutorily via appraisal.
The cleansing effect on a transaction of a majority vote of disinterested
corporate stock was explained by our Supreme Court in Corwin v. KKR Financial
Holdings LLC.103 “Delaware corporate law has long been reluctant to second-guess
the judgment of a disinterested stockholder majority that determines that a
transaction with a party other than a controlling stockholder is in their best
interests.”104 Accordingly, “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.”105
102 See generally Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 313–14 (Del. 2015) (discussing policy). 103 125 A.3d 304 (Del. 2015). 104 Id. at 306. 105 Id. at 309 (internal citations omitted).
18 The Plaintiffs point to the language from Corwin quoted above to argue that
if they have simply pled an entire fairness case, no cleansing is possible.106
However, the cleansing doctrine has subsequently been clarified by this Court: as
the Chancellor recently noted, “the Supreme Court did not intend [by the language
quoted above] to suggest that every form of transaction that otherwise may be subject
to entire fairness review was exempt” from cleansing by vote.107 Instead, as clarified
in a learned discussion by Vice Chancellor Slights in Larkin v. Shah,108 “the only
transactions that are subject to entire fairness that cannot be cleansed by proper
stockholder approval are those involving a controlling stockholder.”109 Importantly,
the mere presence of a controller does not trigger entire fairness per se.110 Rather,
coercion is assumed, and entire fairness invoked, when the controller engages in a
conflicted transaction, which occurs when a controller sits on both sides of the
transaction, or is on only one side but “competes with the common stockholders for
consideration.”111 In these scenarios, “[c]oercion is deemed inherently present,”
106 See Oral Arg. Tr. 36:16–37:4 (Sept. 27, 2016). 107 Solera, 2017 WL 57839, at *6 n.28 (citing Larkin v. Shah, 2016 WL 4485447, at *10 (Del. Ch. Aug. 25, 2016)). 108 2016 WL 4485447 (Del. Ch. Aug. 25, 2016). 109 Id. at *10. 110 Id. at *8. See Kahn v. M & F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014) (“[E]ntire fairness is the highest standard of review in corporate law. It is applied in the controller merger context as a substitute for the dual statutory protections of disinterested board and stockholder approval, because both protections are potentially undermined by the influence of the controller. However . . . that undermining influence does not exist in every controlled merger setting, regardless of the circumstances.”). 111 Larkin, 2016 WL 4485447, at *8.
19 unlike “in transactions where the concerns justifying some form of heightened
scrutiny derive solely from board-level conflicts or lapses of due care.” 112 Thus,
“[i]n the absence of a controlling stockholder that extracted personal benefits,” if a
majority of the Company’s disinterested stockholders approves the transaction with
a fully informed, uncoerced vote, then the business judgment rule applies “even if
the transaction might otherwise have been subject to the entire fairness standard due
to conflicts faced by individual directors.”113 Moreover, “[w]hen the business
judgment rule standard of review is invoked because of a vote, dismissal is typically
the result. That is because the vestigial waste exception has long had little real-world
relevance, because it has been understood that stockholders would be unlikely to
approve a transaction that is wasteful.”114
The Plaintiffs argue that entire fairness applies because a majority of the
Board is conflicted, which as discussed above can be cleansed with an informed
vote, but in doing so the Plaintiffs point to Ferro’s control and/or desire for liquidity
as the cause of the conflicted Board. Given the recent and on-going development of
this Court’s cleansing jurisprudence, I give the Plaintiffs here the benefit of the
doubt; I infer from Plaintiffs’ arguments that they have adequately presented for
consideration here the contention that entire fairness applies—and that cleansing is
112 Id. at *12. 113 Id. at *1 (emphasis added). 114 Singh v. Attenborough, 137 A.3d 151, 151–152 (Del. 2016).
20 unavailable—because Ferro was a controlling stockholder. However, even
assuming Ferro was a controlling stockholder, I find that he did not extract any
personal benefits because his interests were fully aligned with the other common
stockholders. Additionally, for the reasons that follow, I find that the disinterested
stockholder vote was fully informed. Therefore, I find that the business judgment
rule applies to the Merger and, since the Plaintiffs do not allege waste, the Complaint
must be dismissed.
1. Even if Ferro was a controller, he did not extract any personal benefits.
The Plaintiffs argue that the Company’s own 10-K shows Ferro is a controller.
As referenced above, the Company’s December 31, 2014 10-K states
Mr. Ferro indirectly owns or controls all of the shares of our common stock owned by Merrick Ventures and Merrick Holdings. Due to their stock ownership, Merrick Ventures and Merrick Holdings have significant influence over our business, including the election of our directors. . . . Merrick Ventures’ and Merrick Holdings’ significant ownership of our voting stock will enable it to influence or effectively control us and the influence of our large stockholders could impact our business strategy and also have the effect of discouraging others from purchasing or attempting to take a control position in our common stock, thereby increasing the likelihood that the market price of our common stock will not reflect a premium for control. 115
The Plaintiffs further point towards Ferro’s “longstanding business and other
relationships” with “all but one member of the Board.” 116 For purposes of this
115 Compl. ¶ 69 (emphasis in original). 116 Pls’ Answering Br. 42–43.
21 Memorandum Opinion, I assume, without finding, that Ferro—despite indirect
ownership of only 26% of Merge stock—was a controller.117 The crux of rebutting
a cleansing vote at the pleading stage, however, lies not merely in showing that a
controller exists, but in pleading facts making it reasonably conceivable that a
controller’s interest was adverse to the other stockholders, as where the controller
“extracted personal benefits.”118
The Plaintiffs allege that Ferro “controlled and manipulated the sales process
to obtain considerable financial benefits and career prospects for himself and his
affiliates, including the majority of Merge’s Board,” not shared with the Company’s
other stockholders.119 Specifically, the Plaintiffs argue that Ferro used his control to
ensure a “quick exit” from his illiquid block of Merge stock and to have the Board
approve the Consulting Agreement Fee of $15 million to Merrick if Merge was sold
for over $1 billion. 120
Regarding alleged liquidity “benefits,” this Court has previously explained
that
a fiduciary's financial interest in a transaction as a stockholder (such as receiving liquidity value for her shares) does not establish a disabling conflict of interest when the transaction treats all stockholders equally . . . . This notion stems from the basic understanding that when a 117 I note, moreover, that companies should be wary of making disclosures for securities law purposes while simultaneously asserting to the contrary for purposes of Delaware law. 118 Larkin, 2016 WL 4485447, at *1 (“In the absence of a controlling stockholder that extracted personal benefits . . . .”) (emphasis added). 119 Compl. ¶ 68. 120 Pls’ Answering Br. 46.
22 stockholder who is also a fiduciary receives the same consideration for her shares as the rest of the shareholders, their interests are aligned.121
The Plaintiffs appear to concede this point, stating that “stock ownership
generally aligns a director or officer’s interests with other stockholders when they
own ‘material’ amounts of stock.”122 The Plaintiffs, however, argue that “those
interests diverge when the director or officer wants to exit their investment but their
holdings are [so] large that they cannot be quickly sold in the open markets.”123 It
is true that exigent circumstances that require a controller to dump stock, for liquidity
purposes, at less than full value, create divergent interests between the controller and
the other stockholders. A simple interest in selling stock on the part of the controller,
by contrast, is insufficient to demonstrate divergent interests. In order for such a
situation to constitute a disabling conflict, a controller must not only seek liquidity
but the circumstances under which she does so must be akin to a “crisis” or a “fire
sale” to “satisfy an exigent need.”124
The Complaint states that Ferro has been slowly selling his stock for the past
six years, which, to my mind, severely discredits any claims of a fire sale or a severe
liquidity crunch. At any rate, the Plaintiffs conceded at Oral Argument that there is
nothing in the Complaint alleging Ferro is in financial distress and that they do not
121 In re Synthes, Inc. S'holder Litig., 50 A.3d 1022, 1035 (Del. Ch. 2012) (emphasis added). 122 Pls’ Answering Br. 45. 123 Id. 124 In re Synthes, 50 A.3d at 1036.
23 allege a “fire sale” situation. 125 As such, and in light of my discussion below
regarding the Consulting Agreement Fee, it seems to me that Ferro’s interest here as
a 26% stockholder is fully aligned with stockholders’ interest to obtain the highest
price possible, notwithstanding his interest, as demonstrated by a long course of
dealing, in liquidating his stock.
The Plaintiffs also argue that the Consulting Agreement Fee provided a
personal incentive to Ferro to place a $1 billion cap on the Merger. In the first
instance, this allegation has the situation precisely backward; the Consulting
Agreement Fee gave Ferro a $15 million extra incentive to want a $1 billion floor,
not a cap, after which point he had the same incentive to maximize price as did the
other stockholders. In any event, acting against his financial interest, Ferro waived
this fee contractually owed to him and thus removed any personal benefit from it.
He instead took the same consideration as the other stockholders and IBM increased
its offer by the amount of the waived Consulting Agreement Fee. In other words,
Ferro essentially forwent the full $15 million and shared it pro rata with the other
stockholders of the Company. The Plaintiffs argue that this waiver came too late
and that the sale process here was already “poisoned” by the existence of this fee. 126
It seems beyond the limits of common-sense, however, that Ferro, as the Company’s
125 See Oral Arg. Tr. 57:22–58:11 (Sept. 27, 2016). 126 Pls’ Answering Br. 47.
24 largest stockholder, would stop at negotiating a price of $1 billion for the Company
and ignore other willing buyers if the possibility of obtaining an even higher deal
price existed. Rather, to my mind, Ferro’s waiver of the Consulting Agreement Fee
fully aligned his interest with the other stockholders of the Company.127 I note that,
as a stockholder, Ferro would receive $188 million on the sale, dwarfing the
consulting fee.128
For the foregoing reasons, I find that it is not reasonably conceivable that
Ferro, assuming he was a controller, extracted any personal benefits. Therefore, the
stockholder vote here cleanses the Merger if that vote was fully informed.
2. The stockholder vote approving the Merger was fully informed.
A plaintiff alleging that a stockholder vote was inadequately informed to
cleanse a transaction must “identify a deficiency in the operative disclosure
document,” which shifts the burden to the defendants to show that “the alleged
deficiency fails as a matter of law in order to secure the cleansing effect of the
127 As to Plaintiffs’ vague reference to post-closing “career prospects” that Ferro obtained for himself and members of the Board, Ferro did not personally obtain post-closing employment and the only director who did obtain post-closing employment with IBM was also a member of management and abstained from voting on the Merger. The Plaintiffs concede that retaining certain management was a condition placed on the deal by IBM. Retaining management, I note, is a “routine occurrence” under our law in deals of this type and generally should not be viewed with suspicion. See Morgan v. Cash, 2010 WL 2803746, at *5 (Del. Ch. July 16, 2010). As such, I find that these alleged “career prospects” enjoyed by others were not personal benefits to Ferro, and that he was not a conflicted controller. 128 As a 26% (indirect) stockholder, Ferro was presumably entitled to $260 million on the $1 billon sale; this apparent discrepancy is not explained in the record.
25 vote.”129 “[W]hen directors solicit stockholder action, they must ‘disclose fully and
fairly all material information within the board’s control.’”130 Obviously, for a
stockholder approval of a transaction to be meaningful, that vote must be based on
an informed understanding of the transaction. This explains this Court’s solicitude
in its jurisprudence regarding a fully informed vote. “Fully informed” does not mean
infinitely informed, however. “The essential inquiry is whether the alleged omission
or misrepresentation is material.”131 Information will be found material if “from the
perspective of a reasonable stockholder, there is a substantial likelihood that it
significantly alters the total mix of information made available.”132 Redundant facts,
insignificant details, or reasonable assumptions need not be disclosed. 133 Nor must
information be disclosed simply because a plaintiff alleges it would be helpful, or
interesting.134
In other words, for purposes of rebutting any cleansing effect here at the
motion to dismiss stage, plaintiffs must sufficiently allege facts that make it
reasonably conceivable that the disclosures were materially misleading in some
129 In re Solera, 2017 WL 57839, at *8. 130 Id. at *9 (quoting Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992)). 131 Id. at *9. 132 In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 899 (Del. Ch. 2016) (internal quotation omitted). 133 See Abrons v. Maree, 911 A.2d 805, 813 (Del. Ch. 2006). 134 See Dent v. Ramtron Int'l Corp., 2014 WL 2931180, at *10 (Del. Ch. June 30, 2014).
26 regard; thus leading to an uninformed vote.135 The Plaintiffs have the pleading
burden to allege material deficiencies; and I consider only the deficiencies alleged
in the Complaint here. 136 Plaintiffs’ alleged disclosure violations are contained
within two broad categories: the summary of Goldman’s financial analysis and
Ferro’s decision to waive the Consulting Agreement Fee contractually owed to him.
The Plaintiffs also raise various other disclosure claims in their Complaint, such as
failing to disclose in the Proxy that Ferro attempted to sell his shares in 2014. 137 The
Plaintiffs do not address these points in their Answering Brief, so I consider them
waived. 138
The Defendants initially argue that the Plaintiffs should be precluded from
pursuing any post-closing disclosure claims because—although the Plaintiffs had
the opportunity to proceed before the merger—they failed to seek correction of the
alleged deficient disclosures via pre-merger injunction.139 The Defendants here
make a policy argument that this Court should foster an incentive system to promote
135 It is worth noting at the outset that the Plaintiffs do not contend that the Defendants failed to disclose the conflicts of interest they allege, with the exception of those discussed infra. See Corwin, 125 A.3d at 312 (“[I]f troubling facts regarding director behavior were not disclosed that would have been material to a voting stockholder, then the business judgment rule is not invoked.”). 136 In re Solera, 2017 WL 57839, at *8. 137 Compl. ¶ 119. 138 See Forsythe v. ESC Fund Mgmt. Co. (U.S.), Inc., 2007 WL 2982247, at *11 (Del. Ch. Oct. 9, 2007) (“The plaintiffs have waived these claims by failing to brief them in their opposition to the motion to dismiss.”) (citing Emerald Partners v. Berlin, 2003 WL 21003437, at *43 (Del. Ch. Apr. 28, 2003) (explaining “[i]t is settled Delaware law that a party waives an argument by not including it in its brief”)). 139 Defs’ Opening Br. 18.
27 an informed stockholder vote. The Defendants argue that after Corwin, plaintiffs
now have an incentive not to litigate disclosure claims before a stockholder vote but
to wait until post-closing “to challenge the application of the business judgment
rule,”140 thus fostering post-closing litigation instead of promoting an informed vote,
the legitimate goal of the litigation. As I have noted elsewhere, the preferred way of
proceeding is for plaintiffs to bring these claims pre-closing to ensure that
stockholders can exercise their right to a fully informed vote. 141 Damages arising
from disclosure deficiencies can be remedied post-close, but the stockholders’ right
to a fully informed vote cannot. 142 In light of the evolving nature of our
jurisprudence, I decline to consider these policy issues here, and assume that the
Plaintiffs may proceed with these claims post-closing.
a. Summary of Goldman’s Financial Analysis
The Plaintiffs allege defects in the disclosure regarding Goldman’s financial
analysis. “[S]tockholders are entitled to receive in the proxy statement a fair
summary of the substantive work performed by the investment bankers upon whose
advice the recommendations of their board as to how to vote on a merger or tender
rely.”143 This fair summary is just that, a summary. 144 Its essence is “not a
140 Id. at 20. 141 See Nguyen v. Barrett, 2016 WL 5404095, at *6 n.56 (Del. Ch. Sept. 28, 2016). 142 Id. at *7. 143 In re Trulia, 129 A.3d at 900 (internal quotations omitted). 144 Id.
28 cornucopia of financial data, but rather an accurate description of the advisor’s
methodology and key assumptions.” 145 “[D]isclosures that provide extraneous
details do not contribute to a fair summary. . . .”146 In other words, the summary
must be sufficient for the stockholders to usefully comprehend, not recreate, the
analysis.
The Plaintiffs allege in the Complaint that the Proxy 1) fails to disclose that
Goldman treated SBC as a cash expense and 2) inadequately describes the present
value of the Company’s NOLs. The Plaintiffs also argue in their Answering Brief,
but not in the Complaint, that the Unlevered Free Cash Flows (the “UFCFs”) actually
used by Goldman were not the UFCFs that the Proxy discloses that Goldman used.
i. UFCF and SBC
The Plaintiffs’ allegations concerning the UFCFs disclosed in the Proxy have
been somewhat of a moving target throughout this litigation. The Plaintiffs first
allege in their Complaint that Goldman understated Merge’s value in its Discounted
Cash Flow (“DCF”) analysis by “atypically” treating SBC as a cash expense and that
the Proxy fails to disclose this fact. 147 However, the Proxy discloses: (1) the
Company’s UFCF projections,148 (2) that Goldman used these projections, 149 and (3)
145 Id. at 901. 146 Id. 147 Compl. ¶¶ 102, 124. 148 Proxy at 33–34. 149 Id. at 30.
29 states that in creating these projections, management used GAAP earnings,150 which,
the Defendants point out, requires treatment of SBC as a cash expense.151 The
Plaintiffs argue that this is not adequate and the treatment of SBC as a cash expense
should have been expressly disclosed. I disagree. Assuming for purposes of this
argument that the accounting treatment of SBC would be material to stockholders, I
find the disclosures here adequate. The Proxy discloses adjustments made to GAAP
earnings in reaching the UFCF projections, but does not mention any adjustment for
SBC despite discussing a handful of adjustments for other line-items. Generally, if
a disclosure does not explicitly state that a Board took a certain action, a reader can
infer that such action did not occur. 152 Thus, I find that the Proxy adequately
discloses that Goldman treated SBC, consistent with GAAP, as a cash expense.
Subsequent to the filing of the Motion to Dismiss, presumably in light of the
Opening Brief, the Plaintiffs have apparently changed their mind over Goldman’s
treatment of SBC, alleging for the first time in their Answering Brief that Goldman
150 Id. at 34 (“Non-GAAP EBIT consists of GAAP earnings before interest and taxes plus restructuring and acquisition-related charges. . . . Unlevered free cash flow was calculated by adding back to tax-effected non-GAAP EBIT depreciation and amortization, adding or subtracting changes in working capital and subtracting capital expenditures and capitalized software.”). 151 See Defs’ Reply Br. 9. See also Shaev v. Adkerson, 2015 WL 5882942, at *11 n.105 (Del. Ch. Oct. 5, 2015) (“Financial accounting standards are . . . subject to judicial notice . . . [s]uch accounting standards require same-period expensing of stock and option grants.”) (citations omitted); (Statement of Financial Accounting Standards No. 123 (revised 2004) (“This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements.”); Financial Accounting Standards Board, Accounting Standards Codification § 718-10-25-2 (requiring entities to “recognize the services received in a share-based payment transaction with an employee as services are received”). 152 See In re Sauer-Danfoss Inc. Shareholders Litig., 65 A.3d 1116, 1132 (Del. Ch. 2011).
30 used a set of UFCF projections that instead treated SBC as a non-cash expense.153
In making this latter argument in their Answering Brief, the Plaintiffs cite to a
presentation to the Board (seemingly obtained in discovery in the Illinois Action)
and allege that there were two different sets of UFCF projections included in this
presentation. 154 One set of projections treated SBC as a cash expense, while the
other did not. The Plaintiffs belatedly allege that, despite the Proxy’s disclosure to
the contrary, Goldman actually used the projection set that treated SBC as a non-
cash expense.155 In other words, the Plaintiffs allege that the Proxy contains not just
a misleading or incomplete disclosure, but a false statement of fact.
As an initial matter, I note that Plaintiffs’ allegations here rely heavily, if not
entirely, on a final presentation to the Board by Goldman apparently obtained during
discovery in the Illinois Action. This presentation is not contained in the Proxy, nor
is it explicitly referenced in Plaintiffs’ Complaint. The Plaintiffs contend that the
presentation should be deemed to be implicitly incorporated by reference in the
Complaint, and argue that the Defendants have conceded as much by contending, in
the briefing, that the Plaintiffs must have relied on the presentation to construct their
Complaint.156 The fundamental problem here, however, is the fact that Plaintiffs’
153 Pls’ Answering Br. 25–26. 154 Id. 155 Id. 156 See Pls’ Supplemental Br. 3 n.2–3.
31 Complaint fails to mention these two cryptic UFCF projection sets, and failed to
allege that Goldman used the set that treated SBC as a non-cash expense. In fact,
Plaintiff’s Complaint makes precisely the opposite allegation, that Goldman treated
SBC as a cash expense, but failed to adequately disclose that fact.157 That was the
allegation the Defendants were required to address in the Motion to Dismiss; they
did so, I have found, adequately. The Plaintiffs seek to shift ground and argue to the
contrary, but may not do so based on the Complaint and the Motion to Dismiss. The
Plaintiffs, alternatively, seek leave to amend their Complaint. However, Court of
Chancery Rule 15(aaa) bars any such amendment here. 158 The Plaintiffs could have
sought to amend upon receiving Defendants’ Motion to Dismiss, but instead they
chose to answer the Defendants’ Motion and in doing so assert an additional, and
contradictory, argument. Accordingly, I find no fault in the Proxy’s disclosure of
the UFCF projections used by Goldman.
The Plaintiffs also argue that the Board was required to disclose the
Company’s projections for SBC for 2015 through 2019, claiming that these
projections are “material” for stockholders “to have a fair summary of the
Company’s historical and projected financials and the financial analyses performed
157 Compl. ¶ 102. 158 See Ct. Ch. R. 15(aaa) (“Notwithstanding subsection (a) of this Rule, a party that wishes to respond to a motion to dismiss under Rules 12(b)(6) or 23.1 by amending its pleading must file an amended complaint, or a motion to amend in conformity with this Rule, no later than the time such party's answering brief in response to either of the foregoing motions is due to be filed.”).
32 by Goldman.”159 Further, the Plaintiffs argue that without such information,
“stockholders could not calculate the Company’s actual UFCFs that were used in
Goldman’s DCF analysis and, therefore, could not accurately value Merge or its
future prospects to determine whether to seek appraisal.” 160 However, “a disclosure
that does not include all financial data needed to make an independent determination
of fair value is not per se misleading or omitting a material fact . . . .”161 Under the
facts alleged here, I find that the Proxy sufficiently provides a fair summary of the
work performed by Goldman and further projections of SBC are not necessary. The
Proxy provides a detailed summary of Goldman’s work, including projections for
Revenue, Gross Profit, EBITDA, EBIT, Net Income, Earnings Per Share, and
UFCF.162 Therefore, to my mind, it is not reasonably conceivable that the actual
projections of SBC, while they might be of interest to stockholders, are necessary
for a fair summary of Goldman’s work in light of the disclosures actually made.
ii. NOLs
The Plaintiffs allege that the Defendants failed to disclose the present value
of Merge’s NOLs, which according to the Plaintiffs was $0.58 per share.163 The
159 Compl. ¶ 128. 160 Pls’ Answering Br. 32. 161 Nguyen v. Barrett, 2015 WL 5882709, at *4 (Del. Ch. Oct. 8, 2015), appeal refused, 146 A.3d 1072 (Del. 2015). 162 Proxy at 28–35. 163 Pls’ Answering Br. 32–33. There is a slight discrepancy regarding the alleged value of the NOLs. Plaintiffs’ Complaint states the present value of the NOLs was $0.59 per share while their briefing gives a value of $0.58 per share. See Compl. ¶ 102; Pls’ Answering Br. 32–33.
33 Proxy does not disclose a separate value for NOLs but does state that “[t]he present
value of net operating losses was calculated using a discount rate of 7.0%, which
reflects our cost of debt.” 164 Again citing the final presentation Goldman made to
the Board, which is not in the Proxy or explicitly referenced in the Complaint, the
Plaintiffs assert that the NOLs were valued separately and that Goldman, using the
7.0% discount rate, reached a value for the Company’s NOLs of $0.58 and
incorporated this value into its DCF. 165 According to the Plaintiffs, the present value
of the Company’s NOLs must be disclosed as a “key input” pursuant to In re
Netsmart Technologies, Inc. Shareholders Litigation.166 The Plaintiffs contend that
the present value of NOLs is important because of its “substantial impact” on the
value reached in Goldman’s DCF analysis.167 Netsmart, however, does not
specifically address NOLs and merely states that “when a banker's endorsement of
the fairness of a transaction is touted to shareholders, the valuation methods used to
arrive at that opinion as well as the key inputs and range of ultimate values generated
by those analyses must also be fairly disclosed.”168 The Defendants, to my mind,
have provided such key inputs. As previously discussed, the Proxy provides
projections for Revenue, Gross Profit, EBITDA, EBIT, Net Income, Earnings Per
164 Proxy at 30. 165 Pls’ Answering Br. 33. 166 924 A.2d 171 (Del. Ch. 2007); Pls’ Answering Br. 33. 167 Pls’ Answering Br. 34. 168 In re Netsmart Techs., Inc. Shareholders Litig., 924 A.2d 171, 203–04 (Del. Ch. 2007) (emphasis added).
34 Share, and UFCF. 169 Again, to repeat my reasoning regarding the separate projection
of SBC above, “all financial data needed to make an independent determination of
fair value” is not required; moreover, “[t]he fact that the financial advisors may have
considered certain non-disclosed information does not alter this analysis.”170 I fail
to see how the separate disclosure of the present value of NOLs under the facts here
would alter the total mix of information available to the stockholders given the
detailed fair summary of Goldman’s work already contained in the Proxy. It may
be of interest to stockholders, but its absence is not material. Accordingly, I find the
Proxy sufficient in its description of how Goldman calculated the Company’s DCF
value.
The Plaintiffs also argue that Merge’s CFO himself did a valuation of the
NOLs, calculating a value of $2 per share. The Plaintiffs appear to base this
allegation on an e-mail from the Company’s CFO, again seemingly produced during
discovery in the Illinois Action and used as an exhibit in deposing an employee of
Goldman Sachs in that action. In that deposition, which I find incorporated as
integral to the Complaint,171 the Goldman Sachs’ employee explained that this $2.00
valuation was based on a potential transaction with a Canadian company and was
169 Proxy at 28–35. 170 Nguyen v. Barrett, 2015 WL 5882709, at *4 (Del. Ch. Oct. 8, 2015), appeal refused, 146 A.3d 1072 (Del. 2015). 171 See In re Morton's Rest. Grp., Inc. Shareholders Litig., 74 A.3d 656, n.3 (Del. Ch. 2013) (discussing incorporating depositions into a complaint). See also Compl. ¶ 14 (Plaintiffs referring to statements made by this Goldman Sachs employee).
35 specific to that transaction due to the possibility of “sell[ing] off the Canadian legal
entities of Merge that actually have a significant tax yield.”172 Goldman rejected this
assumption.173 To my mind, disclosing a speculative valuation, limited to a
hypothetical Canadian transaction, not relied on by the banker, would not be helpful
to, and may instead mislead, stockholders.
b. The Consulting Agreement Fee
The Plaintiffs argue the Defendants failed to disclose in the Proxy that Ferro
waived the consulting fee “for the purpose of avoiding the creation of a special
committee” and “not for the purpose of obtaining a price increase, as disclosed in
the Proxy.”174 The Proxy discloses that the Board was considering a special
committee “in light of” the Consulting Agreement Fee. The Proxy also discloses
that, during negotiations
Ferro also suggested that if IBM were willing to increase the price paid to all stockholders, [Ferro’s Company] Merrick Ventures would consider waiving the contemplated consulting fee of $15 million. . . . [L]ater that evening, [IBM e-mailed Dearborn] indicating that IBM would raise its price . . . if Merrick Ventures would waive the consulting fee.175
The Plaintiffs argue that, even if true, these statements misled stockholders into
thinking that Ferro’s reason for the waiver was a price increase for stockholders, and
172 Defs’ Reply Br., Transmittal Aff. of D. McKinley Measley, Esq., Ex. 1, Sinclair Dep. at 64:6– 66:13. 173 See id. 174 Pls’ Answering Br. 35. 175 Proxy at 23.
36 cite to Ferro’s deposition testimony from the Illinois Action in which Ferro states
that he and IBM “didn’t want to do a special committee” and that IBM “did not want
a special committee, which [Ferro] agreed with them on.” 176 The Plaintiffs argue
that this shows Ferro’s subjective reason for waiving the Consulting Agreement Fee
was to avoid the creation of a special committee. In other words, the Plaintiffs argue
that Ferro’s intent with respect to the waiver was not to increase the price of the
Merger, as the Plaintiffs allege the Proxy misleadingly suggests, but was simply an
effort by both IBM and Ferro to avoid the creation of a special committee.
“[D]isclosures relating to the Board's subjective motivation or opinions are
not per se material, as long as the Board fully and accurately discloses the facts
material to the transaction.”177 Put more simply, “[a]sking ‘why’ does not state a
meritorious disclosure claim” under our law. 178 Here, the Proxy disclosed that the
Board was considering a special committee “in light of” the Consulting Agreement
Fee, and disclosed the fact that Ferro waived this fee.179 The Proxy does not disclose,
and was not required to disclose, Ferro’s subjective motivation for waiving the
Consulting Agreement Fee. It does not seem reasonably conceivable to me that an
176 Transmittal Aff. of Derrick B. Farrell, Esq., Ex. C, Ferro Dep. at 62. 177 In re MONY Grp., Inc. S'holder Litig., 853 A.2d 661, 682 (Del. Ch. 2004). 178 See In re Sauer-Danfoss, 65 A.3d at 1131. 179 See Compl. ¶ 89, Proxy at 23 (“[The Board] was considering the formation of a special committee to negotiate the proposed merger with IBM in light of the fact that, with the changed price in the transaction, the Merrick consulting agreement would provide for a $15 million payment to Merrick Ventures.”) (emphasis added).
37 additional disclosure surrounding Ferro’s alleged subjective motivation for waiving
the Consulting Agreement Fee—a waiver that benefited all stockholders pro rata—
would “alter the total mix of information” available to those stockholders in deciding
whether to approve the Merger. Accordingly, I find that the Board provided
sufficient information about Ferro’s waiver of the Consulting Agreement Fee.
The Plaintiffs also argue that the Defendants failed to disclose in the Proxy
that Ferro was willing to waive the Consulting Agreement Fee “for any other
potential purchaser and not just IBM.”180 The Plaintiffs’ argument seems to be that
failure to disseminate such a willingness on Ferro’s part depressed the sales price,
by failing to so inform hypothetical third-party purchasers. I note that a Board owes
no disclosure duty to third parties such as other potential purchasers, especially
speculative potential unknown purchasers such as here. Moreover, I am not
convinced that a broad public announcement of Ferro’s willingness to waive his fee
for any bidder would necessarily support a higher sales price.181 More to the point,
however, for purposes of adequate disclosure to cleanse, disclosure to the
180 Pls’ Answering Br. 35. 181 The Plaintiffs argue that the market would consider the $15 million Consulting Agreement Fee as additional to the $26 million termination fee, effectively creating a termination fee of $40 million in the minds of potential bidders. This is dubious, but if true resulted in an aggregate breakup fee of under 4%, which is not facially unreasonable. Plaintiffs’ argument here would carry more weight had there been another known bidder waiting in the wings from whom the Defendants withheld Ferro’s broad willingness to waive his consulting fee. Such facts are not alleged here, however. In any event, the issue goes to process claims, which I need not reach given my decision here.
38 stockholders of Ferro’s subjective intent with respect to hypothetical bidders is not
material to the stockholders.
B. The Business Judgment Rule Applies to the Merger
Based on the foregoing, the Merger was approved by an uncoerced vote of a
majority of the Company’s disinterested stock, without the presence of a controller
who extracted personal benefits. The Plaintiffs allege that the vote was insufficiently
informed; I find that the Defendants have met their burden, through reference to the
available record, to demonstrate that the vote was informed. Accordingly, the
business judgment rule applies to the Board’s decision to approve the Merger. Since
the Plaintiffs do not allege waste with respect to that decision, the Complaint must
be dismissed under 12(b)(6) for failure to state a claim.
III. CONCLUSION
For the reasons discussed above, Defendants’ Motion to Dismiss is granted.
To the extent the foregoing requires an Order to take effect, IT IS SO ORDERED.
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In Re Merge Healthcare Inc. Stockholder Litigation, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-merge-healthcare-inc-stockholder-litigation-delch-2017.