By Stephen B. Brauerman

In a question of first impression, the Court of Chancery applied Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.’s heightened standard of review to determine whether to enjoin a merger split evenly between cash and stock consideration. As regular readers of DBCI know, Revlon requires corporate boards, under certain circumstances, to focus their efforts on maximizing the company’s value in order to obtain the best possible price for stockholders. Though the Court ultimately declined to enjoin the merger, In re Smurfit-Stone Container Corporation Shareholders Litigation, C.A. No. 6164-VCP, provides a detailed, if fleeting, glimpse into the Court’s consideration of increasingly complicated deals involving both cash and stock consideration. Since the Delaware Supreme Court ultimately will have the last word on Revlon’s scope, a reality Smurfit-Stone recognizes, this case is likely just a prelude to the next chapter of the Revlon saga.

FACTUAL AND PROCEDURAL CONTEXT

Smurfit-Stone Container Corporation (“Smurfit-Stone” or the “Corporation”) emerged from bankruptcy in June, 2010, having shed “significant debt, clos[ed] several underperforming mills, and reduc[ed] its workforce by approximately ten percent,” and with a new board of directors (the “Board”) composed of nine independent, outside directors and two management holdouts who survived the bankruptcy with temporary consulting contracts. These consulting contracts, negotiated by the creditors’ committee and approved by the United States Bankruptcy Court, obligated the Corporation to pay the inside directors substantial bonuses if Smurfit-Stone engaged in a “change of control” transaction before September 30, 2011.

Following the bankruptcy, the new board launched a nationwide search for a permanent Chief Executive Officer. While conducting this search, in September, 2010, Smurfit-Stone received an unsolicited offer from Company A to sell the Corporation in an all-cash transaction for $29 per share (the “Company A Offer”). The Board created a special committee (the “Committee”) consisting of the nine outside directors to evaluate the Company A Offer. The Committee engaged independent financial and legal advisors and ultimately found the Company A Offer inadequate. Though Smurfit-Stone attempted to negotiate the Company A Offer to obtain a higher price, Company A withdrew its offer on December 17, 2010 and advised that it would not proceed with the transaction.

Independent of the Company A Offer, in late 2010, Rock-Tenn Company (“Rock-Tenn”), a Smurfit-Stone competitor, expressed interest in acquiring the Corporation. The Committee began to explore Rock-Tenn’s interest and initially offered an all-stock, no-premium merger that would have left Smurfit-Stone stockholders with 55% of the combined entity. From January 4, 2011 through January 23, 2011, the Committee negotiated the Rock-Tenn offer and, after obtaining several interim price increases, ultimately accepted Rock-Tenn’s “best and final” offer of $35 per share, split roughly between cash and stock (the “Rock-Tenn Transaction”). The Rock-Tenn Transaction represented a 27% premium over the Corporation’s then trading price and left Smurfit-Stone stockholders with 45% of the combined entity.

In approving the Rock-Tenn Transaction, the Committee obtained a fairness opinion from its financial advisor that valued the Corporation at a range of $27-$39 per share. The Committee also negotiated a merger agreement that contained a reciprocal “no-shop” provision with a “fiduciary out” clause that permitted the Board to consider unsolicited offers to acquire the Corporation notwithstanding its consent to the Rock-Tenn Transaction, matching rights for Rock-Tenn in the event of a superior competing offer, a