Opinion ID: 1952721
Heading Depth: 1
Heading Rank: 24

Heading: Deal Protection Devices Require Enhanced Scrutiny

Text: The dispositive issues in this appeal involve the defensive devices that protected the Genesis merger agreement. The Delaware corporation statute provides that the board's management decision to enter into and recommend a merger transaction can become final only when ownership action is taken by a vote of the stockholders. Thus, the Delaware corporation law expressly provides for a balance of power between boards and stockholders which makes merger transactions a shared enterprise and ownership decision. Consequently, a board of directors' decision to adopt defensive devices to protect a merger agreement may implicate the stockholders' right to effectively vote contrary to the initial recommendation of the board in favor of the transaction. [25] It is well established that conflicts of interest arise when a board of directors acts to prevent stockholders from effectively exercising their right to vote contrary to the will of the board. [26] The omnipresent specter of such conflict may be present whenever a board adopts defensive devices to protect a merger agreement. [27] The stockholders' ability to effectively reject a merger agreement is likely to bear an inversely proportionate relationship to the structural and economic devices that the board has approved to protect the transaction. In Paramount v. Time , the original merger agreement between Time and Warner did not constitute a change of control. [28] The plaintiffs in Paramount v. Time argued that, although the original Time and Warner merger agreement did not involve a change of control, the use of a lock-up, no-shop clause, and dry-up provisions violated the Time board's Revlon duties. This Court held that [t]he adoption of structural safety devices alone does not trigger Revlon. Rather, as the Chancellor stated, such devices are properly subject to a Unocal analysis.  [29] In footnote 15 of Paramount v. Time , we stated that legality of the structural safety devices adopted to protect the original merger agreement between Time and Warner were not a central issue on appeal. [30] That is because the issue on appeal involved the Time's board [decision] to recast its consolidation with Warner into an outright cash and securities acquisition of Warner by Time. [31] Nevertheless, we determined that there was substantial evidence on the record to support the conclusions reached by the Chancellor in applying a Unocal analysis to each of the structural devices contained in the original merger agreement between Time and Warner. [32] There are inherent conflicts between a board's interest in protecting a merger transaction it has approved, the stockholders' statutory right to make the final decision to either approve or not approve a merger, and the board's continuing responsibility to effectively exercise its fiduciary duties at all times after the merger agreement is executed. These competing considerations require a threshold determination that board-approved defensive devices protecting a merger transaction are within the limitations of its statutory authority and consistent with the directors' fiduciary duties. Accordingly, in Paramount v. Time , we held that the business judgment rule applied to the Time board's original decision to merge with Warner. [33] We further held, however, that defensive devices adopted by the board to protect the original merger transaction must withstand enhanced judicial scrutiny under the Unocal standard of review, even when that merger transaction does not result in a change of control. [34]