IN THE COURT OF CHANCERY OF THE STATIE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
STATE OF WISCONSIN INVESTMENT )
BOARD, on behalf of itself and all others )
similarly situated,
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V.
WILLIAM BARTLETT, JAY N. COHN,
MARK Bl. HIRSCH, EUGENE L. STEP,
RICHARD C. WILLIAMS, and MEDCO
RESEARCH, INC.,
Defendants.
) CA. No. 17727
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Submitted: February 9,200O
Decided: February 24,200O
MEMORANDUM OPINION
Stuart M. Grant, Cynthia A. Calder, Megan D. McIntyre, John C. Kairis and
Denise T. DiPersio of Grant & Eisenhofer, Wilmington, Delaware.
Attorneys for Plaintiff.
A. Gilchrist Sparks, III, Alan J. Stone, S. Mark Hurd and Jessica Zeldin of
Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware. OF COUNSEL:
James R. Daly, Lee Ann Russo and Robert C. Micheletto of Jones, Day,
Reavis & Pogue, Chicago, Illinois. Attorneys for Defendants.
STEELE:, V.C.
Plaintiff brings this action, on behalf of itself and all others who own
Medco common stock, to enjoin a shareholder vote on the proposed merger
between Medco Research Inc. (“Medco”) and King Pharmaceuticals, Inc.
(“King”) and to enjoin the merger’s consummation.
Plaintiffs request for injunctive relief is based on allegations of
breaches of the fiduciary duties of care, loyalty, and disclosure. In assessing
the viability of this claim, the Court of Chancery must determine whether the
plaintiffs has established (1) a likelihood of success on the merits of its
claims; (2) imminent and irreparable harm if the vote and/or merger are not
enjoined; and that (3) in balance, the plaintiff will suffer more if the vote and
merger are not enjoined than the defendants will suffer if they are. I
conclude that plaintiff does not meets its burden.
This Court must defer to the discretion of the board and acknowledge
that their decisions are entitled to the benefit of the business judgment rule
where plaintiff can not show that the board of directors, in approving and
recommending a merger agreement:
(1) failed
to
inform themselves
adequately about the merger negotiation process, the terms or the market
effect of the terms of the merger in a manner which constitutes gross
negligence; (2) did not maximize the interests of the shareholders; (3) did
not disclose material information that would adversely effect the ability of
reasonable shareholders to make an informed decision as part of the total
mix of information available to them.
Therefore, plaintiffs request for preliminary injunctive relief is
denied.
I.
A.
Background
The Parties
Plaintiff, State of Wisconsin Investment Board (“SWIB”), is an
investment manager for the Wisconsin public employees retirement system.
SWIB holds 1,206,400 shares of common stock, which comprises 11.5% of
the outstanding shares of Medco.
Defendant Medco, a Delaware
corporation, is a pharmaceutical company specializing in cardiovascular
medicines and adenosine receptor technologies.
Defendant Richard C.
Williams (“Williams”) is the Chairman of Medco’s board of directors. The
remaining
members of the board of directors are defendants, William
Bartlett, Jay N. Cohn, Mark B. Hirsch, Eugene L. Step (collectively with
Williams, the “Board”).
Plaintiff brings this action requesting that this Court enjoin a
shareholder vote on the proposed merger between Medco and King
Pharmaceuticals, Inc. (“King”) and enjoin the merger’s consummation.
3
B.
Factual and Procedural Background
1.
Factual Background
In 1996, amid concern for maintaining its growth and maximizing the
value of its product pipeline, Medco began to explore the possibility of
finding a merger partner. To assist in its effort, Medco retained Hambrecht
& Quist, LLC (“H&Q”), an investment banking firm with considerable
experience in the pharmaceutical industry and with Medco in particular.
In the early months of 1999, King approached Medco regarding the
possibility of forming a business combination between the two corporate
entities.
The Medco board voted to appoint its Chairman, Williams, to
represent Medco in the Medco-King merger negotiatio’ns.’
After agreeing to approve a merger agreement, the Medco board, in a
proxy statement dated January 5, 2000, recommended that shareholders vote
for the Medco-King merger at the shareholders’ meeting scheduled for
February 10, 2000.
Because of disputes plaintiff raised concerning
omissions and mischaracterized statements contained in the original proxy
solicitation, the Medco board issued a supplemental proxy on January 3 1,
’ Both plaintiff and defendants concede that Williams was to receive .75% of the
aggregate value of the consideration to be paid to Medco in any strategic alliance
involving Medco. Additionally, Williams was awarded 30,000 options for Medco’s
shares.
4
2000 to supplement and/or correct the disclosures contained in the original
proxy.
2.
Procedural Posture
On January 11, 2000, plaintiff instituted this action to enjoin
preliminarily the shareholder vote on the Medco-King merger and to enjoin
the consummation of the merger. On January 12,2000, this Court expedited
proceedings given the February 10, 2000 shareholders’ meeting. The Court
held oral argument on February 9, 2000 and by written Order, enjoined and
postponed the February 10, 2000 shareholder vote for at least fifteen days
allowing a later vote if the parties so chose.2
C.
Contentions
Plaintiff requests injunctive relief based on allegations of corporate
waste and breach of the fiduciary duties of care, loyalty, and disclosure.
1.
Plaintiffs Contentions
Plaintiff contends it has satisfied each of the criteria set forth for the
issuance of a preliminary injunction and is, therefore, entitled to relief.
Plaintiff has asked this Court to assess the Medco-King merger in
accordance with the “entire fairness” standard of review asserting that it has
2 State of Wisconsin Znvestmetit Board v. Bartlett, et al., Del. Ch., C.A. No. 17727,
order, Steele, V.C. (Feb. 9,200O).
5
sufficiently rebutted the presumption that the Medco board’s action are
entitled to the protection of the business judgment rule.3
Pla.intiff argues that a majority of Medco’s direc,tors are self-interested
and not independent. It further asserts that no reasonably prudent business
person of sound judgment would have negotiated and monitored the deal and
then have: structured it as Medco’s board has done. The plaintiff asserts that
it is manifest that the only explanation for the resulting deal is that the board
either put its interest before that of the shareholders or acted grossly
negligently by failing to monitor the transaction appropriately.
(1)
Plaintiff Claims Medco ‘s Directors Breached their Fiduciary
Duties as follows:
(a) Disclosure
l
They failed to disclose all information material to the
shareholders’ decision on the merger.
l
There are outright falsehoods, misleading statements
and omissions in both the original proxy solicitation
and the supplemental disclosure that a reasonable
investor would find material.
l
The “corrective” supplemental (disclosure fails to cure
four “misdisclosures” about infi~rmation necessary for
shareholders to cast an informed vote.
3 See Mills Acqlcisition Co. v. MacMillan, Inc., Del. Supr., 559 A.2d 1261, 1279 (1989)
(since the business judgment rule was sufficiently rebutted “the challenged transaction
must withstand rigorous judicial scrutiny under the exacting standards of entire
fairness.“).
6
(b) Care:
l
The board did not adequately inform themselves of all
information reasonably available in order to
recommend this merger agreement.
l
They appointed Williams as sole negotiator , with an
improper financial incentive that created a conflict
between his own interests and those of the
shareholders and further comp80unded their error by
negligently failing to supervise or oversee his actions.
(c) Loyalty:
l
l
2.
Agreed to lock-up devices employed in the merger
(collar, termination fee, no talk/no shop provision,
stock option agreements) and allowed Williams to
steamroll past other more favorable potential deals.
l
(2)
The board allowed Williams to advance his own
interests by structuring the merger to assure King the
deal would become reality rather than on more
favorable terms that would have tended to maximize
shareholder value.
The free rein given Williams resulted from a majority
of the board’s relationships and close ties with
Williams which limited their independence and
colored their interests.
The Medco Directors committed corporate waste by agreeing
to Williams ‘fee arrangement in the merger.
Defendants’ Contentions
Defendants contend that plaintiff has not met the criteria for the
issuance of a preliminary injunction.
To the extent the original proxy
solicitation left some room for confusion, defendant, without conceding
error, submits that the supplemental proxy sent to shareholders adequately
corrected any n&disclosures in the original proxy solicitation. In short,
defendants contend that plaintiffs application should be denied for the
following reasons:
(1)
No Likelihood of Success on the Merits
l
Medco’s board is disinterested and independent,
l
The board’s process to approve the rnerger agreement was
proper and they were adequately informed.
l
The board engaged in a thorough and exhaustive search,
with the assistance of H&Q, to identify possible alternatives
for maximizing shareholder value.
0 Williams kept the board well informed of all important
developments.
0 All facts alleged to have been omitted have either been
deemed immaterial or were fully disclosed in the original
proxy solicitation or supplemental proxy.
(2)
No Imminent Irreparable Harm
u The supplemental proxy cured all deficiencies in the original
proxy solicitation.
e Shareholders have neither been deprived of the opportunity
to “shop” the company nor have the lock-up devices
employed by Medco deterred other su:itors.
(3)
Balance of Hardships Weighs Against Issuing a Preliminary
Ii@.mction
l
Enjoining this merger, after an exh.austive, diligent, but
unsuccessful search for other partners, would cause Medco
shareholders to lose their only opp80rtunity to receive a
premium on their shares.
l
Medco’s stock would decline if the merger were to be
enjoined (potentially to a price below $20 per share).
l
Medco would face significant risks if they remained as an
independent, stand-alone company.
II.
Discussion
Plaintiff shareholder may obtain a preliminary injunction by
establishing the following three elements: (1) a reasonable likelihood of
success on the merits; (2) imminent, irreparable harm if an injunction is not
granted; and, (3) the damage to plaintiff if the injunction does not issue
outweighs the damage to defendants if injunction does issue.4 This test is
stringent and the relief is extraordinary. After evaluating plaintiffs claims, I
find that the circumstances surrounding the February 25, 2000 Shareholder
Meeting and the proposed Merger do not warrant -preliminary injunctive
relief
4 Mills Acquisition Co., infru at 1278-79.
9
A.
Reasonable Likelihood of Success on the Merits
1.
Standard of Judicial Review
Before evaluating the likelihood of plaintiffs success on the merits, it
is essential to determine the appropriate standard of judicial review to assess
whether the directors breached their fiduciary duties in the context of this
merger. Plaintiff claims that the Medco board’s actions are subject to the
entire fairness standard on the basis of disloyalty and an abdication of
directorial duty that amounts to gross negligence.5 Defendants claim that
there is no evidence of self-interest that would justify depriving the Medco
board of the protection of the business judgment rule and its presumption
that directors act loyally.
Directors have an unyielding fiduciary duty to -protect the interests of
the corporation and the shareholders alike.6 In the context of a merger, a
breach of fiduciary duty analysis begins with the rebuttable presumption that
a board of directors acted with care, loyalty, and in “good faith.” Unless this
presumption is sufficiently rebutted, raising a reasonable doubt about self-
5 Plaintiff alleges that Williams, as sole director responsible for negotiating the merger,
had financial interest in the merger and selectively “filtered” in:formation to the remainder
of the Medco board Furthermore, plaintiff alleges that the Medco board abdicated its
directorial duties by permitting Williams to negotiate the merger with limited
participation from the remaining Medco board members.
6 Cede & Co. v. Technicolor, Inc., Del. Supr., 634 A.2d 345, 360 (1993).
10
interest or independence, the Court must defer to the discretion of the board
and acknowledge that their decisions are entitled to the protection of the
business judgment rule. In order to require application of the entire fairness
standard, the plaintiff has to show that a majority of directors have a
financial interest in the transaction or a motive to entrench themselves in
office through the merger.’
Plaintiffs allegations of self-interest do not meet the threshold
necessary to rebut the presumption of the business judgment rule and require
an analysis of the board’s actions under an entire fairness standard. One
director’s alleged interest, as here in a fee related to consummation of the
merger, related to his work and tied to overall enhancement in the value of
the merger transaction is simply not enough to mandate strict scrutiny of the
Medco board’s actions.8
Plaintiff has only alleged facts concerning the
financial interest at stake for Williams. Plaintiff offers nothing to indicate
that Williams’ interest was not aligned with that of the shareholders. While
it may w~ell be so that Williams would get nothing if no deal gets done, he
has every reason to attempt to negotiate the highest consideration possible
for Medco’s shareholders.
His stake rises with the value of the deal.
Nothing about the directors’ relationships to Williams suggests their loyalty
‘See Grobow v. Perot, Del. Supr., 539 A.2d 180,188 (1988).
11
has been tainted or that they have an interest inconsistent with their duty of
loyalty to Medco and its shareholders.
Whether or not the directors’ actions constitute an abdication of
directorial duty is a fact specific question.” In other words, does the record
indicate any self-interest or lack of independence on the part of the Medco
board which caused them to delegate responsibility to Williams to negotiate
the merger and to abandon any responsibility to review his work? The
decision by the Medco board to delegate responsibility to Williams to
negotiate the merger is “not an abdication of directorial authority merely
because [it] limit[s] a board’s freedom of future action.“” Rather, the
decision by the Medco board to delegate responsibility to Williams can only
be regarded as a valid exercise of business judgment.” I do not find that the
conclusory statements suggesting inferences proffered by plaintiff exhibit
any aspect of self-interest or lack of independence that would support the
imposition of the entire fairness standard. What the record actually shows is
that: four of five directors had no economic interest in the outcome of the
merger negotiations; they had no entrenchment motive; no evidence that
*. See Cede v. Technicolor, Inc., Del. Supr. 634 A.2d 345 (1993).
9 See Rosenblatt v. Getty Oil Co., Del. Supr., 493 A.2d 929,94.3 (1985) (finding that the
directors delegation of responsibility to others is an exercise of business judgment)..
lo Grimes v. Donald, Del. Supr., 673 A.2d 1207, 1214 (1996).
” Rosenbllatt, infra at 943.
12
Williams controlled any other directors through any power to affect their
related or unrelated economic interests.
2.
Did the Medco directors breach their duty of care by failing
to inform themselves adequately?
Thle plaintiffs allegations do not demonstrate that the Medco board
failed to inform itself of all material facts concerning the proposed merger
with King.
The parties genuinely disagree about the materiality of facts and the
inferences to be drawn from those on which they do agree to be true and
material. I can not discern from the bounty of facts presented by counsel
what is and what is not truthful. What I can do is determine whether the
members of the Medco board were adequately informed of all material
information reasonably available prior to approving the merger agreement.
Based on the record before me, it is fair to say that there is substantial
disagreement about the efforts taken by Medco’s board to engage in
discussions with other potential suitors and the efforts taken to inform the
board of material facts concerning this merger.
Amid concern of
maintaining growth and maximizing the value of its product pipeline, the
Medco board began efforts to find a suitable partner to form a business
combination. While not every potential suitor either became the subject of
intense scrutiny or implicated mutual due diligence, the Medco board could
13
not invariably control whether or not potential suitors wished to negotiate.
In its effort to “shop” the company, the Medco board retained H&Q to assist
in finding a potential suitor.
It bears noting that H&Q was intimately
familiar with Medco’s business resulting from providing investment banking
advice earlier.
The record does not provide any further insight about the extent of
each suit’ors expressed interest in a potential business combination with
Medco. If it did, this opinion would conceivably require more careful
analysis than is reasonable and necessary given plaintiffs claims. What is
apparent from the record is that Medco, with the experience and assistance
of H&Q, aggressively sought out suitors who might benefit from Medco’s
existing drug pipeline and income stream. In fact, H&Q played an integral
part in M:edco’s efforts to canvass the market to seek: a more economically
viable business combination.
Plalintiff contends that the Medco board acted with gross negligence
in: (1) deterring potential suitors; (2) relying on the advice of its investment
banker; (3) relying on the reports provided by Williams and Medco’s own
due diligence team; and (4) including a collar, termination fee, no talk/no
shop provision, and a grant of a stock option to King12..
Nothwithstanding plaintiffs allegations, it seems apparent to me that
the evidence equally supports the view that Medco’s board proceeded with
the King merger because its efforts had failed to find a viable combination
with other suitors. The proposed merger with King to Medco’s shareholders
appeared to be a viable and preferable option to going it alone.
They
considered the advice and assessment of the Medco due diligence team,
reasonably relied upon their investment banker’s advice and appropriately
apprised the fear that appearing “over-shopped” could frustrate any deal.
Pla.intiff s more particularized basis for assessment of the board’s
actions stem from Medco’s board’s decision to have ‘Williams negotiate the
merger agreement while enjoying a financial incentive to bring about a deal
and the board’s alleged failure to monitor his actions. Plaintiffs theory has
no support in our case law nor on those facts. This scenario is quite unlike
Macmillan,‘3 upon which plaintiff primarily relies,
In Macmillan, the
negotiators were also active bidders. Williams neither had ties to King nor
any other potential acquirer. His charge was to negotiate the best business
I2 The “lock-up” devices also included a “pooling of interests” tax accounting treatment
that was subsequently rendered moot at oral argument.
I3 Mills Acquisition Co. v. Macmillan, Inc., Del. Supr. 559 A.%d 1261 (1989).
15
deal he could consistently with the board’s firm judgment that Medco could
no longer go it alone. He undertook that mission incentivized by a fee tied
to the best result he could obtain for all shareholders in a market where
overshopping the company and its deleterious effect on its attractiveness had
to be considered as well as the limited number of potential acquirers.
Williams regularly briefed the board, Medco had its own due diligence team
and Medco’s investment bankers, no strangers to Medco’s market niche,
rendered ,a fairness opinion on which the board relied.
I conclude that Medco’s board met its duty of care in proceeding with
the King merger. Despite the material disputes of fact, I am confident that
Medco’s board adequately informed themselves of all material information
necessary to execute the merger agreement.
3.
Did the board breach their duty of loyalty by not acting in
the best interests of the shareholders?
The underlying premise to establishing whether the Medco board
breached their fiduciary duty of loyalty is: Did the board act in its members
own independent conflicted self-interest or in the best interest of the
shareholders? In other words, would the King merger maximize value to its
shareholders?
In order for me to find that plaintiff would likely succeed at a trial on
the merit.s on any breach of the fiduciary duty of lo:yalty, I would have to
16
accept, as plaintiff suggests, the contention that the Medco directors acted in
their
own
self-interest on the basis of their personal and/or business
relationships with one another.‘” Evidence of personal and/or past business
relationships does not raise an inference of self-interest. As I stated earlier,
the facts do not support a conclusion that the Medco directors acted
inconsistently with what they believed to be the best interest of Medco
sharehold.ers.
“[T]he plaintiff alleges nothing about the genesis of this
proposed merger, whether in negotiations or in the proposed
terms, to lead me to conclude that the actions of the board as a
whole (as well as the self-interest of the director-shareholders)
were not in alignment with the interests of all [Medco]
shareholders.“i5
Plaintiff has attempted to demonstrate that the entire process by which
Medco and King pursued this merger agreement was “tainted” by the
directors’ self-interest flowing from business dealings in the past with
Williams who stood to gain personally if the merger with King became a
reality. Moreover, plaintiff asks this Court to examine self-interest on the
part of H&Q on the basis that it had done business with King in the past,
wanted to keep them as a client and had to build an internal “firewall”
I4 Plaintiff states that the both of the directors who voted to approve the merger, Bartlett
and Hirsch, have business and/or personal relationships with Williams dating back to
1969.
“In re IXC Communications, Inc., Shareholders Litig., Del. ICh., Consol. CA. No.
17324 & C.A. No. 17334, Steele, V.C. (Oct. 27, 1999).
17
separating employees who had worked for King apart from those advising
Medco; the failure of the Medco board to conduct a market check; the failure
of the Medco board to conduct independent valuations to assess the
economic fairness of the King merger; the failure of the Medco board to
negotiate an adequate and fair merger; and, by employing lock-up devices.16
I can not, on the basis of these allegations find that the board either
willfully left itself uninformed in order to serve its “self-interest” or failed to
act in “good faith and in the honest belief that the [merger] was in the best
interests of the company.“‘7
It is equally apparent to me that the board
sufficiently complied with the “good-faith” standard ;set forth by this Court
in Aronsolz. The efforts of the Medco board to give thorough consideration
to the analysis prepared by H&Q, to complete due diligence of King, and to
stimulate interest one last time regarding merger discussions with other
suitors leads me to conclude that the directors were: acting to benefit the
economic: interests of the shareholders. I can not reasonably conclude,
solely on the bases that Williams acted self-interestedly by receiving
compensation for his efforts in negotiating a deal, that the goal of this
i6 Lock-up devices employed include: no talk/no shop provision, termination fee, and a
grant of stock option.
l7 Aronsonr v. Lewis, Del. Supr., 473 A.2d 805, 812 (1984).
18
strategic combination was anything other than an attempt to maximize the
value of the interest of the corporation and shareholders.
One can not plausibly contend, in light of the written and oral record,
that the actions of the Medco board suggested disloyalty either to the
corporation or its shareholders. The approval of the merger agreement and
the recommendation to shareholders results from Medco board’s best,
informed judgment.
In light of this Court’s inability to conclude that the facts now before
it support breaches of either the duty of care or duty of loyalty, plaintiffs
claims have no reasonable likelihood of success on the merits.
4.
Duty of Disclosure
The “duty of disclosure” arises as a subset of a director’s fiduciary
responsibilities of care, loyalty, and “good faith.“” A board of directors
seeking shareholder approval of a specific corporate action must disclose all
material facts relating to the requested action so that #shareholders can make
an informed decision.”
Medco issued a proxy statement soliciting shareholder approval for
the merger with King. In the midst of allegations of false and misleading
‘* Malone v. Brincat, Del. Supr., 722 A.2d 5, 11 (1998).
I9 Id. at 12.
19
statements and omissions of material facts, Medco issued a supplemental
disclosure to disarm the allegations surrounding the initial proxy.20
Arguably, in light of this Court’s Order to enjoin and postpone the
February 10, 2000 shareholders’ meeting for fifteen days, the supplemental
disclosure has provided sufficient time for shareholders to consider the
disclosure, make an informed decision, and return the proxy card.
Therefore, any disputes concerning the reasonableness of the time period to
receive, consider, and act upon the supplementary proxy materials are moot.
The issue that lingers is whether the m&disclosures in the board’s
original proxy solicitation not cured by the supplement are material to the
shareholders ability to make an informed decision as part of the “total mix”
of information available to them.
“Directors are required to provide
shareholders with all information that is material to the action being
requested. and to provide a balanced, truthful account of all matters disclosed
in the communications with shareholders.“21
The well-settled standard for materiality states:
2o The Supplemental Proxy was issued January 3 1,200O to Medco’s stockholders, a full
ten days prior to the shareholders’ meeting scheduled for February 10,200O. Since that
time, by Court Order, the February 10,200O shareholders’ meeting was enjoined and
postponed for fifteen days or until such later time as the parties agreed that the
shareholders would have adequate time to assimilate the information necessary to cast an
informed vote. State of Wisconsin Investment Board, infra at “7.
21 Malone, infra at 12 citing Zirn v. VLICorp., Del. Supr., 681 A.2d 1050, 1056 (1996).
20
An omitted fact is material if there is a substantial likelihood
that a reasonable shareholder would consider it important in
deciding how to vote . . .It does not require proof of a substantial
likelihood that disclosure of the omitted fact would have caused
the reasonable investor to change his vote. What the standard
does contemplate is a showing of a substantial likelihood that,
under all the circumstances, the omitted fact would have
assumed actual significance in the deliberations of the
reasonable shareholder. Put another way, there must be a
substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable reasonable investor
as having significantly altered the “total mix” of information
made available.22
Th-is Court does not defer to directors’ judgment about what
information is material. It is a matter for the Court to determine from the
record at the particular stage of a case when the issue arises.23
Pla.intiff contends that the supplementary, corrective disclosure, while
enriching the quality of information potentially available to the shareholder,
fails to address its concern about the fairness of the merger approval and
recommendation process utilized by the Medco board or the adequacy of the
price.
Specifically, plaintiff advances the notion that the Medco board’s
failure to disclose information surrounding the val.uation methodologies
employed by H&Q, the Fujisawa offer, and Medco’s inability to find a
potential suitor constitute breach of the directors’ duty to disclose all
22 Rosenblatt, inj?a at 944 quoting TSCIndustries, Inc., v. Nort,h-way, Inc., 426 U.S. 438,
449.
23 In re Anderson, Clayton Shareholders Litig., Del. Ch., 519 tL2d 669, 675 (1986).
21
material information necessary to provide a balanced, truthful account of the
action being requested of the shareholders.
Applying the materiality standard, I conclude that the Medco board
fully met its duty of complete disclosure. The corrective disclosure issued
by Medco was designed to cure any complaints that the earlier information
was
misleading,
incomplete,
and/or
susceptible to inconsistent
interpretations.
I am not convinced that the alleged omissions represent information
that a reasonable shareholder would consider to have significantly altered
the “total mix” of information made available.
Defendants first alleged omission regarding indications of interest
from other potential suitors need not be disclosed as those discussions were
preliminalry in order to explore the possibility of a business combination that
might lead to a merger agreement, and little more. I further find plaintiffs
allegations regarding the omission of the Fujisawa offer to be without merit.
The prox.y filly discloses Fujisawa’s all-cash offer. This interest is never
hidden from the shareholders - only the details that made that option
unlikely to bear fi-uit. One can not conclude that a failure to disclose the
details of negotiations gone south would be either viably practical or
material to shareholders in the meaningful way intended by our case law.
22
The mere existence of unrequited attraction with other entities does not lead
to acceptance of plaintiffs assertion of materiality - namely that
shareholders would then know other deals might be possible and that there
might be better options than the King merger agre3ement.24 The Medco
board’s judgment that it would have been futile to pursue the Fujisawa offer,
in other words, is not a misleading partial disclosure denying shareholder’s
information on a “significant prospect,” generally considered to be a
material fact.25 The proxy disclosed the underlying m.aterial fact of the offer
and the dlecision not to pursue it.
As for the alleged omission concerning the valuation methodologies
employed by H&Q, I find that the Medco board ad.equately disclosed all
relevant material information.26
The analyses applied by H&Q in
developing its Fairness Opinion are adequate and appropriate and I do not
find anything unusual about their judgment that need be disclosed to the
shareholders as part of their “total mix” of information.
The proxy
statements contained sufficient factual information from the H&Q
investme:nt bankers to assist the shareholders decision making.
24 IIZ re: Lukens Inc., Del. Ch., C.A. No. 16102, Lamb, V.C., 1999 Del. Ch. 233 (Dec. I,
1999).
25 See In re the Walt Disney Co. Derivative Litigation, Del. Ch., 731 A.2d 342, 376
(1998) aff d in part, rev’d in part and remanded, Del. Supr., No. 469, 1998 (Feb. 9,200O).
26 In re 3Com Corporation Shareholders Litigation, Del. Ch., CA. No. 16721, Steele,
V.C., (Oct. 25, 1999).
23
I find that the dissemination of both the original proxy solicitation and
the supplemental disclosure have enabled Medco shareholders to make an
informed decision based upon material information necessary as part of the
“total mix” of information available to them. Therefore, I conclude that the
plaintiff can not satisfy its burden to establish that it is likely to succeed on
the merits of its disclosure claims at trial.
5.
Medco’s Use of Lock-Up Devices
Delaware law permits lock-ups and related agreements “where their
adoption is untainted by director interest or other breaches of fiduciary
duty.“27 Therefore, in the absence of breach of fiduciary duty in agreeing to
the lock-up devices, these provisions are reviewable as business judgments
and are, thus, granted deference. Neither the collar, termination fee, no
talk/no shop provision, nor stock option agreements were used here as
defensive mechanisms instituted to respond to a perceived threat from a
potential acquirer making a competing bid for Medco.
6.
Corporate Waste
Plaintiff asserts that the fee paid to Williams to negotiate the King
merger amounts to corporate waste. Compensation to executives for their
27 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del. Supr., 506 A.2d 173, 176
(1986).
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efforts
on
behalf of a corporation has consistently been approached in a
corporate waste claim with caution by our courts . . . “where, as here, there
is no reasonable doubt as to the disinterest of . . . the Board, mere
disagreernent cannot serve as grounds for imposing liarbility based an alleged
breaches of fiduciary duty and waste.“28
As our Supreme Court recently stated:
To rule otherwise would invite courts to become superdirectors, measuring matters of degree in business
decisionmaking and executive compensation.29
I earlier explained the futility of plaintiffs assertion of lack of
independence and self-interest on the part of the board apart from Williams.
Williams’ efforts as a negotiator brought consideration for the fee designed
to incentivize his efforts for the corporation and its shareholders. There is
no viable claim for corporate waste.
B.
Irreparable Harm
Plaintiffs contentions that the original proxy solicitation and the
supplement disclosure omitted or mischaracterized material facts that deny
Medco shareholders the opportunity to make a fully informed decision on
the merger is without merit. Because the evidence at this stage makes it
28 In re The Walt Disney Co. Derivative Litig., 73 1 A.2d at 364, supra.
29 In re The Walt Disney Co. Derivative Litig., Del. Supr., No. 469, 1998, at 41 (Feb. 9,
2000).
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unlikely that the plaintiff can show at a hearing on the merits that the Medco
board failed to provide the shareholders with all the information a
reasonably prudent shareholder would find material in the total mix required
in order cast an informed vote, plaintiff will not be subject to irreparable
harm if the vote goes forward as scheduled.
I recognize the irreversible harm which would occur by permitting a
shareholder vote on a merger to proceed without all material information
necessary to make an informed decision. The Medco board, however, has
presented the shareholders with an adequate supplementary disclosure,
corrected to show all material information arguably absent from the original
proxy solicitation and to allay concerns over misreadings which may be
misleading. Plaintiffs second argument in support of its claim that a failure
to enjoin the vote and the merger preliminarily would constitute, imminent
irreparable harm is without merit. Plaintiff claims imminent and irreparable
harm from being deprived of the opportunity to have Medco shopped.
Medco’s desire to form new alliances was well known in the pharmaceutical
industry and its investment advisors, H&Q were familiar with the players.
There is no record support for the speculation that any clause in the merger
agreement deterred other ready, willing and able suitors. King’s option is
26
not preclusive and the agreement allowed Medco to follow up on any
materializing superior proposal.
C.
Balance of Harm
The balance of the relative harm to Medco should the merger not go
forward, versus the harm to shareholders should the merger be consummated
will and should ultimately be determined by a fully informed shareholder
voted on February 2.5,2000.
The Medco board has evaluated the proposed merger with King. The
proxy materials submitted to all shareholders sufficiently outline the efforts
the board undertook in approving and recommending the merger agreement.
The facts alleged do not persuade me that the board, either through gross
negligence or through lack of loyalty to Medco’s shareholders, manipulated
the deliberative process in order to deprive the shareholders of a meaningful
opportunity to approve or reject the Medco-King merger.
The shareholders, based upon the information available to them from
all sources, should reject the merger if they believe that information supports
the view that there exists better alternative business combinations in the
marketplace than the King merger or that Medco’s future lies in standing
alone.
They should vote for the merger if they believe the information
available supports the conclusion that the King merger is the only viable
27
option likely to enhance, in any meaningful way, shareholder value. Now
that it is clear to me that there has been no showing of a likelihood of
success on the merits of the disclosure claims, the shareholders it seems to
me, are the better judges of whether their interests would be harmed or
enhanced by this merger. Should the merger vote be enjoined on this record,
the harm to Medco and its shareholders caused by dep:riving the shareholders
of an opportunity to decide on the King merger outweigh the harm to
plaintiff by denying its application to enjoin both the vote and merger
preliminalrily.
D.
Supplemental Issue
On. February 17, 2000, plaintiff filed a second motion for preliminary
injunction, obviously after the Court’s ruling postponing the vote and before
the Count could issue an opinion following the hearing on the first motion
for preliminary injunction.
The second motion focuses on the timing of the shareholder vote and
the “ramifications of the date on which the Medco Stockholders Meeting”
was to be rescheduled. The plaintiff alleges that the Medco board never met
to consider the financial consequences of the par-tic-ular rescheduling date
nor did they solicit or receive any advice on the financial consequences. The
plaintiff .believes the date chosen to be financially disadvantageous to the
28
stockholders and to Medco and by failing to acknowledge this and act
accordingly by rescheduling the vote and/or by withdrawing their
recommendation for the merger, the Medco directors have failed in the
execution of their duty to make an informed judgment.
Plaintiff requests mandatory injunctive relief before all the factual
circumstances assumed by them can be determined. The plaintiff wishes me
to order the board to meet and communicate to the shareholders whether the
merger “-is still in the best interests of’ Medco shareholders. The basis for
calculating the terms of exchange for the shares has not changed and the
voting shareholders presumably know those terms and can vote accordingly.
The boarld set a date consistent with the Court Order. The shareholders may
not in fact approve the merger on February 25th. If they do not, plaintiffs
renewed motion for injunctive relief will be moot. I note, interestingly, that
plaintiff rs first motion and the consequences flowing from it are in part
responsible for the changing financial picture describe:d by plaintiff but none
of this argument appeared in the first hearing or in the written papers. No
hearing will be scheduled for a preliminary injunction on these grounds for
the reasons stated elsewhere in this Opinion as well as for the reasons stated
in this section.
29
III. Conclusion
Plaintiffs request for preliminary injunction i.s hereby denied with
respect to the shareholder vote and denied with respect to the merger.
IT IS SO ORDERED.
m uJ.J---LL.L.L... ( Vice Chancellor
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