Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

In November, the Delaware Chancery Court agreed to temporarily bar C&J Energy Services Inc. investors from voting on a proposed merger between C&J and the hydraulic fracturing and well-sealing units of Nabors Industries Ltd.   The court directed C&J to seek out buyers during a 30-day freeze.  The record below was somewhat sketchy, but the court granted the injunction because in “approving the transaction, the board did not consider alternative transactions. The board did not seek out other potential buyers. The board’s review of the merger process was more akin to what one would expect from a board pursuing an acquisition rather than one selling a company.”

The Supreme Court of Delaware reversed the Chancery Court decision.

C&J was acquiring the Nabors CPS business, but to do so after the closing Nabors would own 53% of the post-closing entity. The record reflected that the C&J directors were aware of the Revlon implications of the transaction.  In the negotiations, C&J’s board negotiated several corporate governance provisions, including the power to designate four board members, which included C&J’s CEO as board chair. C&J also bargained for an unusual “buy-side” fiduciary out, allowing for a lengthy and viable post-signing market check, with a termination fee of 2.27% of the deal value.  C&J did not however conduct an active auction process before entering into the merger agreement.

The Delaware Supreme Court noted “Although the record before us reveals a board process that sometimes fell short of ideal, Revlon requires us to examine whether a board’s overall course of action was reasonable under the circumstances as a good faith attempt to secure the highest value reasonably attainable. When that standard is applied to this record, we cannot conclude that the plaintiffs have proven that the majority-independent C&J board acted unreasonably in negotiating a logical strategic transaction, with undisputed business and tax advantages, simply because that transaction had change of control implications.”

The Delaware Supreme Court also noted the following:

  • Revlon involved a decision by a board of directors to chill the emergence of a higher offer from a bidder because the board‟s CEO disliked the new bidder, after the target board had agreed to sell the company for cash. Revlon made clear that when a board engages in a change of control transaction, it must not take actions inconsistent with achieving the highest immediate value reasonably attainable.
  • Revlon does not require a board to set aside its own view of what is best for the corporation’s stockholders and run an auction whenever the board approves a change of control transaction. There is no single blueprint that a board must follow to fulfill its duties, and a court applying Revlon’s enhanced scrutiny must decide “whether the directors made a reasonable decision, not a perfect decision.”
  • Under Revlon a board can pursue the transaction it reasonably views as most valuable to stockholders, so long as the transaction is subject to an effective market check under circumstances in which any bidder interested in paying more has a reasonable opportunity to do so.   Such a market check does not have to involve an active solicitation, so long as interested bidders have a fair opportunity to present a higher-value alternative, and the board has the flexibility to eschew the original transaction and accept the higher-value deal.  The ability of the stockholders themselves to freely accept or reject the board’s preferred course of action is also of great importance in this context.

The Supreme Court also noted that the issuance of the mandatory injunction was improper because that can only occur after a trial and making findings of fact or if the injunction is based solely on undisputed facts.  There was also no record to support the judicially ordered infringement of Nabors’ contractual rights because there was no finding that Nabors aided and abetted C&J’s board’s alleged breach of fiduciary duties.  According to the Court, “The decisions in which the Delaware Supreme Court has issued or affirmed the issuance of injunctions targeted to specific deal protection terms all involved viable claims of aiding and abetting against the holder of third party contract rights.”


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