May 13, 2012
Injunction Junction, Not Our Function: Court of Chancery Grapples with Enjoining Stockholder Votes on Troubled Transactions
By Stephen B. Brauerman
While more than 90% of publicly announced mergers face lawsuits from dissatisfied stockholders, obtaining a preliminary injunction to enjoin such transactions remains a tall order. Within the span of one week in February, three different members of the Delaware Court of Chancery each considered expedited challenges to proposed mergers (In re El Paso Corporation Shareholders Litigation, C.A. No. 6949-CS (Feb. 29, 2012), In re Micromet, Inc., Shareholders Litigation, C.A. No. 7197-VCP (Feb. 29, 2012), and In re Delphi Financial Group Shareholder Litigation, C.A. No. 7144-VCG (Mar. 6, 2012)) and--despite facts that led the court to conclude in two cases that serious breaches of fiduciary duty may exist--declined to enjoin the contemplated transaction. Instead, in each instance, the court chose to respect the shareholder franchise and allowed the stockholders to decide for themselves whether to approve the merger. Secure that the combination of monetary damages and appraisal rights would adequately, albeit imperfectly, protect dissenting shareholders, the Court of Chancery refused to enjoin shareholder votes on transactions that offered substantial premiums over pre-announcement market price where no alternative bidders were readily apparent--even in the face of disappointing, if not defective, negotiation processes. Even when faced with troubling circumstances, the Court of Chancery's prompt denial of each of these preliminary injunction motions demonstrates its respect for the shareholder franchise and unwillingness to deprive stockholders of the ability to think for themselves.
As with most equitable remedies, the Court of Chancery has substantial discretion to enjoin a challenged merger. Nevertheless, in order to obtain a preliminary injunction (as set out in the Micromet decision), a plaintiff must demonstrate "(1) a reasonable probability of success on the merits at a final hearing; (2) an imminent threat of irreparable injury; and (3) a balance of the equities that tips in favor of issuance of the requested relief." While a plaintiff must prove each element, "there is no steadfast formula for the relative weight each deserves. Accordingly, a strong demonstration as to one element may serve to overcome a marginal demonstration of another." Canter Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 579 (Del. Ch. 1998). The adequacy of money damages makes it difficult for a stockholder plaintiff to demonstrate the requisite irreparable harm.
While more than 90% of publicly announced mergers face lawsuits from dissatisfied stockholders, obtaining a preliminary injunction to enjoin such transactions remains a tall order. Within the span of one week in February, three different members of the Delaware Court of Chancery each considered expedited challenges to proposed mergers (In re El Paso Corporation Shareholders Litigation, C.A. No. 6949-CS (Feb. 29, 2012), In re Micromet, Inc., Shareholders Litigation, C.A. No. 7197-VCP (Feb. 29, 2012), and In re Delphi Financial Group Shareholder Litigation, C.A. No. 7144-VCG (Mar. 6, 2012)) and--despite facts that led the court to conclude in two cases that serious breaches of fiduciary duty may exist--declined to enjoin the contemplated transaction. Instead, in each instance, the court chose to respect the shareholder franchise and allowed the stockholders to decide for themselves whether to approve the merger. Secure that the combination of monetary damages and appraisal rights would adequately, albeit imperfectly, protect dissenting shareholders, the Court of Chancery refused to enjoin shareholder votes on transactions that offered substantial premiums over pre-announcement market price where no alternative bidders were readily apparent--even in the face of disappointing, if not defective, negotiation processes. Even when faced with troubling circumstances, the Court of Chancery's prompt denial of each of these preliminary injunction motions demonstrates its respect for the shareholder franchise and unwillingness to deprive stockholders of the ability to think for themselves.
As with most equitable remedies, the Court of Chancery has substantial discretion to enjoin a challenged merger. Nevertheless, in order to obtain a preliminary injunction (as set out in the Micromet decision), a plaintiff must demonstrate "(1) a reasonable probability of success on the merits at a final hearing; (2) an imminent threat of irreparable injury; and (3) a balance of the equities that tips in favor of issuance of the requested relief." While a plaintiff must prove each element, "there is no steadfast formula for the relative weight each deserves. Accordingly, a strong demonstration as to one element may serve to overcome a marginal demonstration of another." Canter Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 579 (Del. Ch. 1998). The adequacy of money damages makes it difficult for a stockholder plaintiff to demonstrate the requisite irreparable harm.
El Paso
In considering whether to enjoin the transaction, the Court of Chancery colorfully noted several facts that made the El Paso Corporation board's otherwise "reasonably debatable choices" subject to greater skepticism. First, El Paso's chief executive officer and primary negotiator did not disclose his interest in leading a post-merger management buyout of one of El Paso's businesses from Kinder Morgan, Inc. In the court's view, "when El Paso's CEO was supposed to be getting the maximum price from Kinder Morgan, he actually had an interest in not doing that." Second, the El Paso board received conflicted advice from Goldman Sachs, Inc. (which owned 19% of Kinder Morgan and designated two of its directors), and then inadequately cabined the conflict by incentivising Morgan Stanley, "the conflict-cleansing bank," to approve the merger since Morgan Stanley would only get paid if El Paso sold to Kinder Morgan. Third, the El Paso board employed a "less than aggressive negotiating strategy" in allowing Kinder Morgan to reduce its bid after threatening a hostile takeover and failed to subject the offer even to a soft-market check. These facts convinced the court, on a preliminary record, that plaintiffs had "a reasonable likelihood of success in proving that the Merger was tainted by disloyalty."