May 28, 2007
Delaware Court Reaffirms Some Less Well-Known Principles of Corporation Law
by Stephen B. Brauerman and Peter B. Ladig
The Delaware Court of Chancery has recently reaffirmed some fundamental, yet less well known, principles that merit the attention of practitioners who advise Delaware corporations and their directors. In Louisiana Municipal Police Employees’ Retirement Sys. v. Crawford, 2007 WL 582510 (Del. Ch. Feb. 23, 2007) and In re Netsmart Technologies, Inc. Shareholders Litigation, 2007 WL 926213 (Del. Ch. March 14, 2007) the Court of Chancery confirmed its respect for the shareholder franchise and emphasized that the laws governing the fiduciary duties of corporate directors are flexible. It also reaffirmed that there are no bright line rules with which directors can comply to avoid liability.
I. The Cases
A. Crawford. In Crawford, the Court of Chancery was asked to enjoin the proposed merger of Caremark Corporation (Caremark) and CVS Corporation (CVS). Caremark and CVS entered into a merger agreement in which Caremark shareholders would receive 1.67 shares of CVS stock for every share of Caremark. Neither companys’ shareholders would receive a premium, and management and the board would be divided evenly between the two companies. The merger agreement also contained certain deal protection devices, including “no-shop” and “last look” provisions,2 and a reciprocal termination fee of $675 million (approximately 3 percent of the total value of the transaction).
After the proposed Caremark-CVS merger became public, Express Scripts, Inc. made an unsolicited offer for Caremark. Although the Express Scripts offer valued Caremark at $26 billion ($3 billion more than the Caremark-CVS merger), Caremark found the Express Scripts offer deficient.3 Following the Express Scripts offer, Caremark and CVS revised their deal to provide for a $2.00 special dividend to Caremark stockholders if the merger was approved. In response, Express Scripts launched an exchange offer for all of the outstanding shares of Caremark on the same terms as its unsolicited offer. Caremark and CVS countered by increasing the special dividend to $6.00 per share upon approval of the merger. Recognizing that Caremark and Express Scripts were “in the throes of an all-out proxy contest for the votes of Caremark stockholders,” the Court of Chancery temporarily enjoined the stockholder vote on the Caremark-CVS Merger to allow stockholders time to digest new information Caremark disclosed during the proxy contest. Crawford, 2007 WL 582510, at *5.
B. Netsmart. In Netsmart, the court considered whether to enjoin a shareholder vote to approve a “going private” merger in which two private equity firms would purchase Netsmart Technologies, Inc. (Netsmart) from its public shareholders. After the merger, private equity would continue to employ current management who, incentivized by option pools, would be motivated to increase the value of Netsmart. The shareholders challenged the merger because of management's involvement in the negotiations despite “the fact that Netsmart management was keenly interested in the future incentives that would be offered by the buyers.” Netsmart, 2007 WL 926213, at *11. The shareholders also challenged management's refusal to pursue a strategic merger and its decision to solicit offers only from private equity firms.4
Although the special committee of the Netsmart board charged with running the sale process sought a “go-shop” provision from the buyers, which would have entitled Netsmart to continue to shop itself after the transaction was publicly announced, the buyers refused. This refusal
The Delaware Court of Chancery has recently reaffirmed some fundamental, yet less well known, principles that merit the attention of practitioners who advise Delaware corporations and their directors. In Louisiana Municipal Police Employees’ Retirement Sys. v. Crawford, 2007 WL 582510 (Del. Ch. Feb. 23, 2007) and In re Netsmart Technologies, Inc. Shareholders Litigation, 2007 WL 926213 (Del. Ch. March 14, 2007) the Court of Chancery confirmed its respect for the shareholder franchise and emphasized that the laws governing the fiduciary duties of corporate directors are flexible. It also reaffirmed that there are no bright line rules with which directors can comply to avoid liability.
I. The Cases
A. Crawford. In Crawford, the Court of Chancery was asked to enjoin the proposed merger of Caremark Corporation (Caremark) and CVS Corporation (CVS). Caremark and CVS entered into a merger agreement in which Caremark shareholders would receive 1.67 shares of CVS stock for every share of Caremark. Neither companys’ shareholders would receive a premium, and management and the board would be divided evenly between the two companies. The merger agreement also contained certain deal protection devices, including “no-shop” and “last look” provisions,2 and a reciprocal termination fee of $675 million (approximately 3 percent of the total value of the transaction).
After the proposed Caremark-CVS merger became public, Express Scripts, Inc. made an unsolicited offer for Caremark. Although the Express Scripts offer valued Caremark at $26 billion ($3 billion more than the Caremark-CVS merger), Caremark found the Express Scripts offer deficient.3 Following the Express Scripts offer, Caremark and CVS revised their deal to provide for a $2.00 special dividend to Caremark stockholders if the merger was approved. In response, Express Scripts launched an exchange offer for all of the outstanding shares of Caremark on the same terms as its unsolicited offer. Caremark and CVS countered by increasing the special dividend to $6.00 per share upon approval of the merger. Recognizing that Caremark and Express Scripts were “in the throes of an all-out proxy contest for the votes of Caremark stockholders,” the Court of Chancery temporarily enjoined the stockholder vote on the Caremark-CVS Merger to allow stockholders time to digest new information Caremark disclosed during the proxy contest. Crawford, 2007 WL 582510, at *5.
B. Netsmart. In Netsmart, the court considered whether to enjoin a shareholder vote to approve a “going private” merger in which two private equity firms would purchase Netsmart Technologies, Inc. (Netsmart) from its public shareholders. After the merger, private equity would continue to employ current management who, incentivized by option pools, would be motivated to increase the value of Netsmart. The shareholders challenged the merger because of management's involvement in the negotiations despite “the fact that Netsmart management was keenly interested in the future incentives that would be offered by the buyers.” Netsmart, 2007 WL 926213, at *11. The shareholders also challenged management's refusal to pursue a strategic merger and its decision to solicit offers only from private equity firms.4
Although the special committee of the Netsmart board charged with running the sale process sought a “go-shop” provision from the buyers, which would have entitled Netsmart to continue to shop itself after the transaction was publicly announced, the buyers refused. This refusal