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

In connection with an M&A transaction, in In Re Pattern Energy Group Inc. Stockholders Litigation the Delaware Court of Chancery determined that that the plaintiff had stated a claim against the director defendants for breach of the duty of loyalty.  The Court then considered the director defendants’ argument that any such breach was cleansed by a stockholder vote and that therefore dismissal was appropriate under Corwin. Corwin gives rise to the irrebuttable presumption of the business judgment rule when a transaction “is approved by a fully informed, uncoerced vote of the disinterested stockholders.”

Plaintiff contended that Corwin does not apply because the vote was uninformed and because a significant block of votes by a preferred holder, CBRE, was not disinterested. According to plaintiff CBRE was neither disinterested nor uncoerced.  Plaintiff argued the vote was not uncoerced as CBRE was contractually obligated to vote its preferred shares in accordance with CBRE Board’s recommendation regardless of its own economic interest.  In addition, plaintiff claimed CBRE was not disinterested because its “preferred shares rolled over into the combined company with an increased dividend rate.”

The Court agreed with the plaintiff. When CBRE acquired its preferred stock it agreed that in the event of any proposed merger it would vote its preferred shares in a manner consistent with the recommendation of the Board. The Court found that because of CBRE’s contractual obligation to vote in favor of the merger, which CBRE agreed to without being informed of the merger’s terms, the director defendants could not invoke Corwin’s protections. Accordingly, CBRE’s vote in favor of the Merger was not informed, and therefore the votes should not be counted to determine of Corwin cleansing applied.

Defendants also failed to demonstrate that CBRE’s vote was voluntary. The business judgment rule standard of review applies only if disinterested and informed stockholders have had the voluntary choice to accept or reject a transaction. According to the Court, the term ‘ratification’ applies only to a voluntary stockholder vote. The essence of Corwin is a court declines to second-guess the board when the stockholders, as a second set of decision makers, have approved the economic merits of a transaction for themselves. To be a meaningful ratifying vote, the stockholder must be voting on the transaction of her own accord and on the transaction’s merits. A stockholder voting in favor of a specific transaction because it had previously contracted to vote in favor of any transaction in exchange for consideration is not offering the second review that supports application of the business judgment rule.

The Court also found CBRE was interested with respect to the Merger and CBRE’s vote could not be counted to determine of Corwin cleansing applied.  CBRE bargained for the right to rollover its preferred stock at a premium into the post-closing company and keep its shares after a merger. In addition, after a change in control, the annual dividend rate on CBRE’s preferred stock would increase by as much as seventy-five basis points, and the holders would receive an accelerated payment on certain otherwise contingent dividends. As a result, CBRE’s merger benefits were not shared with the Company’s public common stockholders, who were to be cashed out. Accordingly, CBRE was interested by virtue of the preferred stock purchase agreement, as it stood to receive benefits from the merger that were not shared with the cashed-out majority.

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