Opinion ID: 1984316
Heading Depth: 1
Heading Rank: 3

Heading: the effect of a fully-informed stockholder vote

Text: Santa Fe argues on appeal that the fully-informed vote of a majority of Santa Fe stockholders extinguishes the Plaintiffs' claims under Unocal v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985), and Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173 (1986). The Court of Chancery found that the fully-in-formed stockholder vote ratified the challenged transaction and extinguished any claims that the Board breached its duty of care. Plaintiffs have not challenged this decision on appeal. The Court of Chancery held, with respect to the Revlon and Unocal claims, that a fully-informed stockholder vote does not extinguish a claim for breaches of the duty of loyalty. Categorizing these claims as arising from the duty of loyalty, the court declined to allow the vote of stockholders on the merger to extinguish the claims. Santa Fe offers the ratification theory as an alternative basis for affirming the dismissal of the Revlon and Unocal claims. As an issue of law, we review the trial court's decision de novo. State v. Maxwell, Del.Supr., 624 A.2d 926, 928 (1993). Before reaching the merits of Santa Fe's argument, plaintiffs' procedural argument must be addressed. Plaintiffs argue that Santa Fe has forfeited its right to raise the ratification argument since it failed to file a cross-appeal from the judgment below. Plaintiffs' argument fails to consider, however, that Santa Fe could hardly appeal the dismissal of all claims against it. Santa Fe is not challenging the judgment below or seeking to enlarge its legal rights. See, e.g., Hoffman v. Dann, Del.Supr., 205 A.2d 343, 355 (1964); Chrysler Corp. v. Quimby, Supr., 51 Del. 264, 144 A.2d 885, 886 (1958); cf. Universal Underwriters Ins. Co. v. The Travelers Ins. Co., Del.Supr., 669 A.2d 45, 49, Walsh, J. (1995) (holding that appellee may not assert argument on appeal which would modify the decision of the trial court in the absence of a cross-appeal). Rather, it is offering an alternative ground, fairly raised below, for this Court to affirm the Court of Chancery. Thus, no cross-appeal is required or appropriate. While the Court of Chancery concluded that claimed breaches of the duty of loyalty are not extinguished by a fully-informed stockholder vote and that Revlon and Unocal claims are duty of loyalty claims for ratification purposes, we reach the same result on different grounds. Revlon and Unocal and the duties of a Board when faced with a contest for corporate control do not admit of easy categorization as duties of care or loyalty. [3] In any event, categorizing these more specific duties as primarily arising from due care or loyalty would not be nearly as helpful in determining the effect of a fully-informed stockholder vote as would an examination of their underlying purposes. The Unocal standard of enhanced judicial scrutiny rests in part on an assiduous ... concern about defensive actions designed to thwart the essence of corporate democracy by disenfranchising shareholders. Unitrin, Inc. v. American Gen. Corp., Del.Supr., 651 A.2d 1361, 1378 (1995). In Unitrin, referring to Stroud v. Grace, Del.Supr., 606 A.2d 75 (1992), we stated: This Court also specifically noted that boards of directors often interfere with the exercise of shareholder voting when an acquiror launches both a proxy fight and a tender offer. We then stated that such action necessarily invoked both Unocal and Blasius  because both [tests] recognize the inherent conflicts of interest that arise when shareholders are not permitted free exercise of their franchise. Consequently, we concluded that, [i]n certain circumstances, [the judiciary] must recognize the special import of protecting the shareholders' franchise within Unocal 's requirement that any defensive measure be proportionate and `reasonable in relation to the threat posed.' Id. at 1379 (citations and footnotes omitted). Revlon also rests on the overriding importance of voting rights, ... Paramount Communications, Inc. v. QVC Network, Inc., Del.Supr., 637 A.2d 34, 42 (1993). Permitting the vote of a majority of stockholders on a merger to remove from judicial scrutiny unilateral Board action in a contest for corporate control would frustrate the purposes underlying Revlon and Unocal. Board action which coerces stockholders to accede to a transaction to which they otherwise would not agree is problematic. See Paramount Communications, Inc. v. Time Inc., Del.Supr., 571 A.2d 1140, 1154 (1990) (We have found that even in light of a valid threat, management actions that are coercive in nature or force upon shareholders a management sponsored alternative to a hostile offer may be struck down as unreasonable and non-proportionate responses.). Thus, enhanced judicial scrutiny of Board action is designed to assure that stockholders vote or decide to tender in an atmosphere free from undue coercion. Unitrin, 651 A.2d at 1388. In voting to approve the Santa Fe-Burlington merger, the Santa Fe stockholders were not asked to ratify the Board's unilateral decision to erect defensive measures against the Union Pacific offer. The stockholders were merely offered a choice between the Burlington Merger and doing nothing. The Santa Fe stockholders did not vote in favor of the precise measures under challenge in the complaint. Here, the defensive measures had allegedly already worked their effect before the stockholders had a chance to vote. [4] In voting on the merger, the Santa Fe stockholders did not specifically vote in favor of the Rights Plan, the Joint Tender or the Termination Fee. [5] Since the stockholders of Santa Fe merely voted in favor of the merger and not the defensive measures, we decline to find ratification in this instance. Accordingly, we now turn to the merits of plaintiffs' Unocal and Revlon claims.