Opinion ID: 1947768
Heading Depth: 1
Heading Rank: 2

Heading: applicable principles of established delaware law

Text: The General Corporation Law of the State of Delaware (the General Corporation Law) and the decisions of this Court have repeatedly recognized the fundamental principle that the management of the business and affairs of a Delaware corporation is entrusted to its directors, who are the duly elected and authorized representatives of the stockholders. 8 Del.C. § 141(a); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811-12 (1984); Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984). Under normal circumstances, neither the courts nor the stockholders should interfere with the managerial decisions of the directors. The business judgment rule embodies the deference to which such decisions are entitled. Aronson, 473 A.2d at 812. Nevertheless, there are rare situations which mandate that a court take a more direct and active role in overseeing the decisions made and actions taken by directors. In these situations, a court subjects the directors' conduct to enhanced scrutiny to ensure that it is reasonable. [9] The decisions of this Court have clearly established the circumstances where such enhanced scrutiny will be applied. E.g., Unocal, 493 A.2d 946; Moran v. Household Int'l, Inc., Del.Supr., 500 A.2d 1346 (1985); Revlon, 506 A.2d 173; Mills Acquisition Co. v. Macmillan, Inc., Del.Supr., 559 A.2d 1261 (1989); Gilbert v. El Paso Co., Del.Supr., 575 A.2d 1131 (1990). The case at bar implicates two such circumstances: (1) the approval of a transaction resulting in a sale of control, and (2) the adoption of defensive measures in response to a threat to corporate control.
When a majority of a corporation's voting shares are acquired by a single person or entity, or by a cohesive group acting together, there is a significant diminution in the voting power of those who thereby become minority stockholders. Under the statutory framework of the General Corporation Law, many of the most fundamental corporate changes can be implemented only if they are approved by a majority vote of the stockholders. Such actions include elections of directors, amendments to the certificate of incorporation, mergers, consolidations, sales of all or substantially all of the assets of the corporation, and dissolution. 8 Del.C. §§ 211, 242, 251-258, 263, 271, 275. Because of the overriding importance of voting rights, this Court and the Court of Chancery have consistently acted to protect stockholders from unwarranted interference with such rights. [11] In the absence of devices protecting the minority stockholders, [12] stockholder votes are likely to become mere formalities where there is a majority stockholder. For example, minority stockholders can be deprived of a continuing equity interest in their corporation by means of a cash-out merger. Weinberger, 457 A.2d at 703. Absent effective protective provisions, minority stockholders must rely for protection solely on the fiduciary duties owed to them by the directors and the majority stockholder, since the minority stockholders have lost the power to influence corporate direction through the ballot. The acquisition of majority status and the consequent privilege of exerting the powers of majority ownership come at a price. That price is usually a control premium which recognizes not only the value of a control block of shares, but also compensates the minority stockholders for their resulting loss of voting power. In the case before us, the public stockholders (in the aggregate) currently own a majority of Paramount's voting stock. Control of the corporation is not vested in a single person, entity, or group, but vested in the fluid aggregation of unaffiliated stockholders. In the event the Paramount-Viacom transaction is consummated, the public stockholders will receive cash and a minority equity voting position in the surviving corporation. Following such consummation, there will be a controlling stockholder who will have the voting power to: (a) elect directors; (b) cause a break-up of the corporation; (c) merge it with another company; (d) cash-out the public stockholders; (e) amend the certificate of incorporation; (f) sell all or substantially all of the corporate assets; or (g) otherwise alter materially the nature of the corporation and the public stockholders' interests. Irrespective of the present Paramount Board's vision of a long-term strategic alliance with Viacom, the proposed sale of control would provide the new controlling stockholder with the power to alter that vision. Because of the intended sale of control, the Paramount-Viacom transaction has economic consequences of considerable significance to the Paramount stockholders. Once control has shifted, the current Paramount stockholders will have no leverage in the future to demand another control premium. As a result, the Paramount stockholders are entitled to receive, and should receive, a control premium and/or protective devices of significant value. There being no such protective provisions in the Viacom-Paramount transaction, the Paramount directors had an obligation to take the maximum advantage of the current opportunity to realize for the stockholders the best value reasonably available.
The consequences of a sale of control impose special obligations on the directors of a corporation. [13] In particular, they have the obligation of acting reasonably to seek the transaction offering the best value reasonably available to the stockholders. The courts will apply enhanced scrutiny to ensure that the directors have acted reasonably. The obligations of the directors and the enhanced scrutiny of the courts are well-established by the decisions of this Court. The directors' fiduciary duties in a sale of control context are those which generally attach. In short, the directors must act in accordance with their fundamental duties of care and loyalty. Barkan v. Amsted Indus., Inc., Del.Supr., 567 A.2d 1279, 1286 (1989). As we held in Macmillan: It is basic to our law that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation. In discharging this function, the directors owe fiduciary duties of care and loyalty to the corporation and its shareholders. This unremitting obligation extends equally to board conduct in a sale of corporate control. 559 A.2d at 1280 (emphasis supplied) (citations omitted). In the sale of control context, the directors must focus on one primary objective  to secure the transaction offering the best value reasonably available for the stockholders  and they must exercise their fiduciary duties to further that end. The decisions of this Court have consistently emphasized this goal. Revlon, 506 A.2d at 182 (The duty of the board ... [is] the maximization of the company's value at a sale for the stockholders' benefit.); Macmillan, 559 A.2d at 1288 ([I]n a sale of corporate control the responsibility of the directors is to get the highest value reasonably attainable for the shareholders.); Barkan, 567 A.2d at 1286 ([T]he board must act in a neutral manner to encourage the highest possible price for shareholders.). See also Wilmington Trust Co. v. Coulter, Del.Supr., 200 A.2d 441, 448 (1964) (in the context of the duty of a trustee, [w]hen all is equal ... it is plain that the Trustee is bound to obtain the best price obtainable). In pursuing this objective, the directors must be especially diligent. See Citron v. Fairchild Camera and Instrument Corp., Del.Supr., 569 A.2d 53, 66 (1989) (discussing a board's active and direct role in the sale process). In particular, this Court has stressed the importance of the board being adequately informed in negotiating a sale of control: The need for adequate information is central to the enlightened evaluation of a transaction that a board must make. Barkan, 567 A.2d at 1287. This requirement is consistent with the general principle that directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them. Aronson, 473 A.2d at 812. See also Cede & Co. v. Technicolor, Inc., Del.Supr., 634 A.2d 345, 367 (1993); Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 872 (1985). Moreover, the role of outside, independent directors becomes particularly important because of the magnitude of a sale of control transaction and the possibility, in certain cases, that management may not necessarily be impartial. See Macmillan, 559 A.2d at 1285 (requiring the intense scrutiny and participation of the independent directors). Barkan teaches some of the methods by which a board can fulfill its obligation to seek the best value reasonably available to the stockholders. 567 A.2d at 1286-87. These methods are designed to determine the existence and viability of possible alternatives. They include conducting an auction, canvassing the market, etc. Delaware law recognizes that there is no single blueprint that directors must follow. Id. at 1286-87; Citron 569 A.2d at 68; Macmillan, 559 A.2d at 1287. In determining which alternative provides the best value for the stockholders, a board of directors is not limited to considering only the amount of cash involved, and is not required to ignore totally its view of the future value of a strategic alliance. See Macmillan, 559 A.2d at 1282 n. 29. Instead, the directors should analyze the entire situation and evaluate in a disciplined manner the consideration being offered. Where stock or other non-cash consideration is involved, the board should try to quantify its value, if feasible, to achieve an objective comparison of the alternatives. [14] In addition, the board may assess a variety of practical considerations relating to each alternative, including: [an offer's] fairness and feasibility; the proposed or actual financing for the offer, and the consequences of that financing; questions of illegality; ... the risk of nonconsum[m]ation;... the bidder's identity, prior background and other business venture experiences; and the bidder's business plans for the corporation and their effects on stockholder interests. Macmillan, 559 A.2d at 1282 n. 29. These considerations are important because the selection of one alternative may permanently foreclose other opportunities. While the assessment of these factors may be complex, the board's goal is straightforward: Having informed themselves of all material information reasonably available, the directors must decide which alternative is most likely to offer the best value reasonably available to the stockholders.
Board action in the circumstances presented here is subject to enhanced scrutiny. Such scrutiny is mandated by: (a) the threatened diminution of the current stockholders' voting power; (b) the fact that an asset belonging to public stockholders (a control premium) is being sold and may never be available again; and (c) the traditional concern of Delaware courts for actions which impair or impede stockholder voting rights (see supra note 11). In Macmillan, this Court held: When Revlon duties devolve upon directors, this Court will continue to exact an enhanced judicial scrutiny at the threshold, as in Unocal, before the normal presumptions of the business judgment rule will apply. [15] 559 A.2d at 1288. The Macmillan decision articulates a specific two-part test for analyzing board action where competing bidders are not treated equally: [16] In the face of disparate treatment, the trial court must first examine whether the directors properly perceived that shareholder interests were enhanced. In any event the board's action must be reasonable in relation to the advantage sought to be achieved, or conversely, to the threat which a particular bid allegedly poses to stockholder interests. Id. See also Roberts v. General Instrument Corp., Del.Ch., C.A. No. 11639, 1990 WL 118356, Allen, C. (Aug. 13, 1990), reprinted at 16 Del.J.Corp.L. 1540, 1554 (This enhanced test requires a judicial judgment of reasonableness in the circumstances.). The key features of an enhanced scrutiny test are: (a) a judicial determination regarding the adequacy of the decisionmaking process employed by the directors, including the information on which the directors based their decision; and (b) a judicial examination of the reasonableness of the directors' action in light of the circumstances then existing. The directors have the burden of proving that they were adequately informed and acted reasonably. Although an enhanced scrutiny test involves a review of the reasonableness of the substantive merits of a board's actions, [17] a court should not ignore the complexity of the directors' task in a sale of control. There are many business and financial considerations implicated in investigating and selecting the best value reasonably available. The board of directors is the corporate decisionmaking body best equipped to make these judgments. Accordingly, a court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second-guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board's determination. Thus, courts will not substitute their business judgment for that of the directors, but will determine if the directors' decision was, on balance, within a range of reasonableness. See Unocal, 493 A.2d at 955-56; Macmillan, 559 A.2d at 1288; Nixon, 626 A.2d at 1378.
The Paramount defendants and Viacom assert that the fiduciary obligations and the enhanced judicial scrutiny discussed above are not implicated in this case in the absence of a break-up of the corporation, and that the order granting the preliminary injunction should be reversed. This argument is based on their erroneous interpretation of our decisions in Revlon and Time-Warner. In Revlon, we reviewed the actions of the board of directors of Revlon, Inc. (Revlon), which had rebuffed the overtures of Pantry Pride, Inc. and had instead entered into an agreement with Forstmann Little & Co. (Forstmann) providing for the acquisition of 100 percent of Revlon's outstanding stock by Forstmann and the subsequent break-up of Revlon. Based on the facts and circumstances present in Revlon, we held that [t]he directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company. 506 A.2d at 182. We further held that when a board ends an intense bidding contest on an insubstantial basis, ... [that] action cannot withstand the enhanced scrutiny which Unocal requires of director conduct. Id. at 184. It is true that one of the circumstances bearing on these holdings was the fact that the break-up of the company . . . had become a reality which even the directors embraced. Id. at 182. It does not follow, however, that a break-up must be present and inevitable before directors are subject to enhanced judicial scrutiny and are required to pursue a transaction that is calculated to produce the best value reasonably available to the stockholders. In fact, we stated in Revlon that when bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced Unocal duties by playing favorites with the contending factions. Id. at 184 (emphasis added). Revlon thus does not hold that an inevitable dissolution or break-up is necessary. The decisions of this Court following Revlon reinforced the applicability of enhanced scrutiny and the directors' obligation to seek the best value reasonably available for the stockholders where there is a pending sale of control, regardless of whether or not there is to be a break-up of the corporation. In Macmillan, this Court held: We stated in Revlon, and again here, that in a sale of corporate control the responsibility of the directors is to get the highest value reasonably attainable for the shareholders. 559 A.2d at 1288 (emphasis added). In Barkan, we observed further: We believe that the general principles announced in Revlon, in Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985), and in Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346 (1985) govern this case and every case in which a fundamental change of corporate control occurs or is contemplated. 567 A.2d at 1286 (emphasis added). Although Macmillan and Barkan are clear in holding that a change of control imposes on directors the obligation to obtain the best value reasonably available to the stockholders, the Paramount defendants have interpreted our decision in Time-Warner as requiring a corporate break-up in order for that obligation to apply. The facts in Time-Warner, however, were quite different from the facts of this case, and refute Paramount's position here. In Time-Warner, the Chancellor held that there was no change of control in the original stock-for-stock merger between Time and Warner because Time would be owned by a fluid aggregation of unaffiliated stockholders both before and after the merger: If the appropriate inquiry is whether a change in control is contemplated, the answer must be sought in the specific circumstances surrounding the transaction. Surely under some circumstances a stock for stock merger could reflect a transfer of corporate control. That would, for example, plainly be the case here if Warner were a private company. But where, as here, the shares of both constituent corporations are widely held, corporate control can be expected to remain unaffected by a stock for stock merger. This in my judgment was the situation with respect to the original merger agreement. When the specifics of that situation are reviewed, it is seen that, aside from legal technicalities and aside from arrangements thought to enhance the prospect for the ultimate succession of [Nicholas J. Nicholas, Jr., president of Time], neither corporation could be said to be acquiring the other. Control of both remained in a large, fluid, changeable and changing market. The existence of a control block of stock in the hands of a single shareholder or a group with loyalty to each other does have real consequences to the financial value of minority stock. The law offers some protection to such shares through the imposition of a fiduciary duty upon controlling shareholders. But here, effectuation of the merger would not have subjected Time shareholders to the risks and consequences of holders of minority shares. This is a reflection of the fact that no control passed to anyone in the transaction contemplated. The shareholders of Time would have suffered dilution, of course, but they would suffer the same type of dilution upon the public distribution of new stock. Paramount Communications Inc. v. Time Inc., Del.Ch., No. 10866, 1989 WL 79880, Allen, C. (July 17, 1989), reprinted at 15 Del.J.Corp.L. 700, 739 (emphasis added). Moreover, the transaction actually consummated in Time-Warner was not a merger, as originally planned, but a sale of Warner's stock to Time. In our affirmance of the Court of Chancery's well-reasoned decision, this Court held that The Chancellor's findings of fact are supported by the record and his conclusion is correct as a matter of law. 571 A.2d at 1150 (emphasis added). Nevertheless, the Paramount defendants here have argued that a break-up is a requirement and have focused on the following language in our Time-Warner decision: However, we premise our rejection of plaintiffs' Revlon claim on different grounds, namely, the absence of any substantial evidence to conclude that Time's board, in negotiating with Warner, made the dissolution or break-up of the corporate entity inevitable, as was the case in Revlon. Under Delaware law there are, generally speaking and without excluding other possibilities, two circumstances which may implicate Revlon duties. The first, and clearer one, is when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company. However, Revlon duties may also be triggered where, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving the breakup of the company. Id. at 1150 (emphasis added) (citation and footnote omitted). The Paramount defendants have misread the holding of Time-Warner. Contrary to their argument, our decision in Time-Warner expressly states that the two general scenarios discussed in the above-quoted paragraph are not the only instances where  Revlon duties may be implicated. The Paramount defendants' argument totally ignores the phrase without excluding other possibilities. Moreover, the instant case is clearly within the first general scenario set forth in Time-Warner. The Paramount Board, albeit unintentionally, had initiate[d] an active bidding process seeking to sell itself by agreeing to sell control of the corporation to Viacom in circumstances where another potential acquiror (QVC) was equally interested in being a bidder. The Paramount defendants' position that both a change of control and a break-up are required must be rejected. Such a holding would unduly restrict the application of Revlon, is inconsistent with this Court's decisions in Barkan and Macmillan, and has no basis in policy. There are few events that have a more significant impact on the stockholders than a sale of control or a corporate breakup. Each event represents a fundamental (and perhaps irrevocable) change in the nature of the corporate enterprise from a practical standpoint. It is the significance of each of these events that justifies: (a) focusing on the directors' obligation to seek the best value reasonably available to the stockholders; and (b) requiring a close scrutiny of board action which could be contrary to the stockholders' interests. Accordingly, when a corporation undertakes a transaction which will cause: (a) a change in corporate control; or (b) a breakup of the corporate entity, the directors' obligation is to seek the best value reasonably available to the stockholders. This obligation arises because the effect of the Viacom-Paramount transaction, if consummated, is to shift control of Paramount from the public stockholders to a controlling stockholder, Viacom. Neither Time-Warner nor any other decision of this Court holds that a break-up of the company is essential to give rise to this obligation where there is a sale of control.