“Cleansing” the Merger: Stockholder Vote Protects Directors from Class Action Where Plaintiffs Fail to Sufficiently Allege Material Deficiency in Proxy Statement

By:  Joanna Diakos Kordalis and Max E. Kaplan

By memorandum-opinion dated January 5, 2017, Chancellor Bouchard granted defendants’ motion to dismiss a putative class action complaint in In re Solera Holdings, Inc. Stockholder Litigation.  Specifically, the Court held that absent allegations specifically identifying material deficiencies in the operative disclosure documents, ratification by a majority of disinterested stockholders rendered defendant-directors’ approval of a merger subject to the business judgment rule.

In Re Solera Holdings, Inc. Stockholder Litig., C.A. No. 10485-CB (Del. Ch. Jan. 5, 2017).  Plaintiffs, former stockholders of Solera Holdings, Inc. (“Solera”) brought this action for breach of fiduciary duty against the eight directors of Solera, seven of whom were outside directors, alleging that the board improperly favored the interests of the company’s founder and upper management in approving its merger with a private equity firm, failed to establish an effective Special Committee or to obtain the highest price possible for Solera, implemented preclusive deal protection devices, and failed to disclose material information about the value of Solera’s stock.  Facing dismissal, plaintiffs argued that the defendants’ actions throughout the merger process—including while eliciting stockholder approval—called for enhanced scrutiny under Revlon and its progeny.

Relying on the Supreme Court of Delaware’s decision in Corwin v. KKR, 125 A.3d 304 (Del. 2015), Chancellor Bouchard rejected plaintiffs’ broad application of Revlon.  Instead, the Court held that, Revlon was “primarily designed to give stockholders and the Court of Chancery the tool of injunctive relief to address important M&A decisions in real time, before closing and was not a tool designed with post-closing money damages in mind.”  Absent special circumstances subject to the “entire fairness” standard, a completed merger approved by a “fully informed, uncoerced vote of disinterested stockholders” is always subject to the business judgment rule.  Further, while a board hoping to “secure the cleansing effect” of a stockholder vote must eventually show the vote was fully informed, “a plaintiff challenging the decision to approve a transaction must first identify a deficiency in the operative disclosure document.”  In other words, to survive a motion to dismiss, a stockholder-plaintiff must allege specific and material omissions or misstatements tainting the stockholder ratification.  Once the plaintiff has done so the burden falls on the defendants to establish that the alleged deficiency fails as a matter of law in order to secure the cleansing effect of the vote.

In this case, the Court rejected plaintiffs’ alleged deficiencies in the directors’ disclosures.  Under Delaware law, information is material only if a reasonable stockholder would conclude it significantly alters the “total mix” of information made available—alleged “troubling facts” regarding the directors’ behavior is wholly insufficient.  Applying this standard, Chancellor Bouchard concluded that in each case the alleged deficient information was either directly disclosed in the pertinent proxy statement, incorporated therein by reference, or otherwise wholly immaterial.

While the Chancery Court’s decision reinforces the cleansing power of stockholder ratification, a less comprehensive proxy statement could have lost the Solera directors the protection of the business judgment rule.  Above all else, In re Solera is a lesson in how proper drafting of disclosure statements can lessen litigation exposure following a merger.