Wednesday, November 12, 2008

Delaware Court Applies Business Judgment Rule to Merger Driven by Financial Crisis

Taking judicial notice of the roiling market crisis, the Delaware Chancery Court applied the business judgment rule to a merger effectuated over a weekend and found that a shareholder challenging the deal stated a colorable claim for violation of the directors’ duty of care. The case implicated important issues of Delaware corporate governance law in light of the current difficult market conditions. The merger was essentially a takeover of the brokerage firm Merrill Lynch by Bank of America. (County of York Retirement Plan v. Merrill Lynch & Co., Del. Chancery Court, No. 4066-VCN).

The shareholder claimed that the directors hastily negotiated and agreed to the merger over a single weekend without adequately informing themselves as to the true value of the company or the feasibility of securing an alternative transaction. It is also alleged that the directors failed to conduct the proper due diligence for the transaction as a result of the speed with which it was put together and did not conduct a pre-agreement market check.

At their essence, reasoned Vice Chancellor Noble, these claims merely attack the speed with which the merger was negotiated, drawing the conclusion that the Merrill board could not have sufficiently informed itself to justify business judgment rule protection over the course of a weekend. No single blueprint exists to satisfy a director’s duty of care, noted the court, and, while such speed might be suspicious, it is not dispositive.

The directors justified their haste by claiming the existence of severe time-constraints and an impending crisis absent an immediate transaction. While taking notice of the state of the markets in early September 2008 along with the share price of Merrill stock during that period, the court would not and should not take notice of the internal affairs of the firm that drove the board’s decision to sell the company over the course of a single weekend. The need to consummate the deal within a mater of days, or even hours, was a business judgment, entitled to deference only if informed. The shareholder claimed that this judgment was uninformed, noted the court, and at this stage the court’s task is to access whether the shareholder raised a colorable claim.

The court concluded that the shareholder did present a colorable claim since to hold otherwise would notice as fact the very essence of the directors’ factual argument and allow inference and conjecture to serve as a factual record. This the court would not do, even though such inference and conjecture might be viewed as reasonable.

The court acknowledged that market pressures on the directors to close the deal so quickly may have existed, adding that Delaware case law supports shaping fiduciary obligations to reflect such a reality. However, the contextual contours of the directors’ fiduciary obligations are fact driven, emphasized the court, and it cannot undertake such a nuanced evaluation by way of an informal scheduling motion.

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