Court Opinion

ID: 4120871
Source: CourtListenerOpinion
Date Created: 2017-01-30 17:06:13.520823+00
Date Added: 2024-06-11T12:54:19.236902
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

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IN RE MERGE HEALTHCARE INC.              )
STOCKHOLDERS LITIGATION                  ) Consol. C.A. No. 11388-VCG
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                        MEMORANDUM OPINION

                      Date Submitted: October 11, 2016
                       Date Decided: January 30, 2017

Seth D. Rigrodksy, Brian D. Long, Gina M. Serra, Jeremy J. Riley, of RIGRODSKY
& LONG, P.A., Wilmington, Delaware; James R. Banko, Derrick B. Farrell, of
FARUQI & FARUQI, LLP, Wilmington, Delaware; OF COUNSEL: Nadeem Faruqi,
of FARUQI & FARUQI, LLP, New York, New York; Juan E. Monteverde, of
MONTEVERDE & ASSOCIATES PC, New York, New York, Attorneys for
Plaintiffs.

David J. Teklits, D. McKinley Measley, of MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Howard S. Suskin, of
JENNER & BLOCK LLP, Chicago, Illinois, Attorneys for Defendants.

GLASSCOCK, Vice Chancellor
        This litigation involves the acquisition of Merge Healthcare, Inc. (“Merge” or

the “Company”) by IBM (the “Merger”).                        The matter is before me on the

Defendants’ motion to dismiss. The Merger was supported by a vote of close to

80% of Merge stockholders. The Plaintiffs, former Merge stockholders, seek post-

closing damages against the Company’s directors for what the Plaintiffs allege was

an improper sale process. Such damages are typically problematic, because they

require a demonstration that the directors breached the duty of loyalty, a rather

difficult target for a plaintiff to hit. Here, however, Merge has chosen to forgo an

exculpation clause in its corporate charter. Therefore, the Director Defendants are

exposed to liability for acts violative of their duty of care, in the context of what the

Complaint describes as a less-than-rigorous sales process. Demonstrating such a

violation is not trivial: it requires a demonstration of gross negligence. Nonetheless,

it is less formidable than showing disloyalty.

        Before considering whether the Complaint states a claim for fiduciary duty

violations, however, I must first consider whether the vote of a majority of

disinterested shares in favor of the Merger serves to cleanse any such violations,

raising the presumption that the Directors acted within their proper business

judgment. The vote here will have such an effect, 1 but only if it was uncoerced and

1
  Leaving only, theoretically, liability for waste, which is not alleged here. The carve-out for waste
is an interesting judicial construct; it is difficult to envision a majority vote in favor of a transaction
so unfavorable as to constitute waste. The hoary doctrine of waste is best viewed here as a kind

                                                    1
fully informed. I find that such is the case; therefore, the motion to dismiss is

granted. My reasoning follows.

                                    I. BACKGROUND2

       A. The Parties

       The Plaintiffs are the owners of Merge common stock and have been

continuously throughout all relevant times. 3 The Complaint lists the entire Merge

Board as the Defendants, consisting of Michael Ferro, Justin Dearborn, William J.

Devers, Neele E. Stearns Jr., Michael P. Cole, Matthew M. Maloney, and Richard

A. Reck.

       Defendant Ferro served as Chairman of the Board of the Company from June

2008 to August 2013 and from November 21, 2014 until the Merger. 4 Ferro was the

founder and CEO of Click Commerce, Inc. (“Click”), which he sold in 2006. 5 That

same year, Ferro started Merrick Ventures LLC (“Merrick”), where he is currently

the Chairman and CEO. 6 At the close of the Merger, Ferro, through Merrick,

received $188 million in “immediate liquidity.” 7

of “judicial out,” a way around the strictures of the cleansing rule given a fact situation of some
undefined level of egregiousness, such that equity would intervene.
2
  The facts, drawn from Plaintiffs’ Verified Consolidated Amended Class Action Complaint (the
“Complaint”), judicially noticeable facts in publicly available SEC filings, and from documents
incorporated by reference therein, are presumed true for purposes of evaluating Defendants’
Motion to Dismiss.
3
  Compl. ¶ 28.
4
  Id. at ¶ 30.
5
  Id. at ¶¶ 4, 30.
6
  Id. at ¶¶ 4, 30.
7
  Id. at ¶¶ 30, 71.

                                                2
        Defendant Dearborn “served as the Company’s President, CEO, Corporate

Secretary and Director of the Board at all relevant times.” 8          Ferro appointed

Dearborn to the Board of the Company in 2008. 9 Dearborn and Ferro worked

together at Click for nine years before its sale in 2006. Dearborn has also spent time

as the Managing Director and General Counsel of Merrick, Ferro’s LLC. 10

        Defendant Devers served on the Board of the Company from February 2014

until the close of the Merger.11 Devers also served as a director of Click until its sale

in 2006.12 After the sale of Click, Devers joined the board of Merrick.13 He was

also previously employed by IBM.14             Devers received over $3.8 million in

immediate liquidity upon the close of the Merger.15

        Defendant Stearns served on the Board of the Company from June 2008 until

the close of the Merger. 16 He also served as the Chairman of the Audit Committee

and as a member of both the Compensation and Executive Committees. 17 Stearns

8
  Id. at ¶ 31.
9
  Id.
10
   Id.
11
   Id. at ¶ 32.
12
   Id.
13
   Id.
14
   Id.
15
   Id. at ¶ 17.
16
   Id. at ¶ 33.
17
   Id.

                                           3
also served as a director of Click “until its sale in 2006.”18 Stearns received over

$5.9 million in immediate liquidity upon the close of the Merger. 19

        Defendant Cole served on the Board of the Company from April 23, 2015

until the close of the Merger. 20 Cole also served with Ferro on the boards of Big

Shoulders Fund and Lyric Opera of Chicago. 21

        Defendant Maloney served on the Board of the Company from August 2012

until the close of the Merger. 22 Maloney received over $1.62 million in immediate

liquidity upon the close of the Merger. 23

        Defendant Reck served on the Board of the Company from April 2003 until

the close of the Merger.24 Reck owned approximately 4,000 shares of IBM before

the close of the Merger, a fact he did not disclose until the day before the Board

approved the Merger Agreement. 25 Reck and Ferro have known each other for

approximately twenty years.26      Reck received over $5.4 million in immediate

liquidity upon the close of the Merger. 27

18
   Id. at ¶ 33.
19
   Id. at ¶ 17.
20
   Id. at ¶ 34.
21
   Id.
22
   Id. at ¶ 35.
23
   Id. at ¶ 17.
24
   Id. at ¶ 36.
25
   Id.
26
   Id.
27
   Id. at ¶ 17.

                                             4
       B. Relevant Non-parties

       Non-party Merge Healthcare, Inc. was a Delaware corporation with its

principal offices in Chicago, Illinois.28           The Company’s business was the

development of healthcare software.29           Previous Defendant but now non-party

Goldman, Sachs & Co. (“Goldman”) is an investment bank that was retained by the

Company to provide financial advice in connection with its possible sale. 30 Non-

party IBM is a New York corporation that provides information technology products

and services.31 Non-party Datong Acquisition Corp. (“Merger Sub”) is a Delaware

corporation and a wholly owned subsidiary of IBM.32 Merger Sub was merged with

and into Merge and ceased its corporate existence upon the completion of the

Merger.33

       C. Factual Overview

       The Plaintiffs brought this class action on behalf of themselves and other

public stockholders of the Company for damages resulting from IBM’s acquisition

of the publicly owned shares of the Company. 34 On August 6, 2015, the Company’s

Board of Directors entered the Company into an Agreement and Plan of Merger (the

28
   Id. at ¶ 29.
29
   Id.
30
   Id. Goldman was dismissed from this action without prejudice on June 9, 2016.
31
   Compl. ¶ 38.
32
   Id. at ¶ 39.
33
   Id.
34
   Id. at ¶ 1.

                                              5
“Merger Agreement”) pursuant to which the Company’s common stockholders

received $7.13 in cash for each of their shares, which represented a 31.8% premium

to the closing price of $5.41 per share of the Company’s common stock on August

5, 2015.35 The holders of the Company’s Series A Convertible Preferred Stock

received $1,500 in cash for each of their shares of Preferred Stock. 36 The Merger

was completed on October 13, 2015 at an approximate value of $1 billion. 37 77.3%

of the Company’s outstanding shares were voted in favor of the Merger.38 As part

of the Merger, certain members of Company management entered into employment

or transition arrangements with IBM, including one of the Defendants, Dearborn.39

              1. Ferro’s Journey

       As a reminder, Ferro started serving as Chairman of the Board in 2008.40

Ferro is also Chairman and CEO of Merrick, which in May 2008 “bought a

controlling interest in Merge by paying $5 million and making a $15 million loan,

which was repaid in 2009.” 41 At that time, Ferro, through Merrick, owned 50.1% of

the Company. 42 Merrick started selling off its shares in 2009, holding 38.1% at the

35
   Id. at ¶ 2; Defs’ Opening Br., Transmittal Aff. of D. McKinley Measley, Esq., Ex. 3, Merge
Healthcare, Inc. Definitive Proxy Statement at 32 (Sept. 11, 2015) (the “Proxy”).
36
   Compl. ¶ 2.
37
   Id.
38
   Defs’ Opening Br., Transmittal Aff. of D. McKinley Measley, Esq., Ex. 6, 10/14/2015 Merge
Form 8-K at 2.
39
   Compl. ¶ 7.
40
   Id. at ¶ 30.
41
   Id.
42
   Id. at ¶ 70.

                                             6
end of 2010 and 26.62% as of August 26, 2015. 43 The Company’s December 31,

2014 10-K states

      Mr. Ferro indirectly owns or controls all of the shares of our common
      stock owned by Merrick Ventures and Merrick Holdings. Due to their
      stock ownership, Merrick Ventures and Merrick Holdings have
      significant influence over our business, including the election of our
      directors. . . . Merrick Ventures’ and Merrick Holdings’ significant
      ownership of our voting stock will enable it to influence or effectively
      control us and the influence of our large stockholders could impact our
      business strategy and also have the effect of discouraging others from
      purchasing or attempting to take a control position in our common
      stock, thereby increasing the likelihood that the market price of our
      common stock will not reflect a premium for control. 44

Ferro resigned from Merge’s Board in August 2013 due to health reasons but

rejoined in November 2014 and was appointed Chairman. 45

             2. The Consulting Agreement

      Merrick had a consulting agreement with the Company that had expired on

December 31, 2013.46 On May 29, 2015, “instead of a compensation package for

Ferro,”47 the Company approved an amended consulting agreement between the

Company, Ferro, and Merrick (the “Consulting Agreement”).48                Under the

Consulting Agreement, “Merrick agreed to provide services to the Company that

43
   Id.
44
    Id. at ¶ 69 (emphasis in original). Merrick owned 26.9% of Merge common stock as of
December 31, 2014. Id. at ¶ 70.
45
   Id. at ¶¶ 72–73.
46
   Id. at ¶ 79.
47
   Proxy at 20.
48
   Compl. ¶ 80.

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included product development and strategic planning” and “the Company agreed to

reimburse Merrick’s expenses related to” those services. 49 Most notably, the Board

agreed that the Company would pay Merrick a one-time fee of $15 million in cash

if the Company consummated a strategic transaction “at an aggregate enterprise

value of at least $1 billion” (the “Consulting Agreement Fee”).50

                  3. The Sale to IBM

       Since 2012, the Company has reviewed its strategic alternatives and met with

potential financial and strategic acquirors.51 In 2013 into early 2014, the Company

received interest in possible acquisitions of or investments in “certain of [their]

businesses or [the] Company as a whole,” but the Company did not receive “any

concrete proposals” that senior management and the Board believed “represented an

attractive price . . . or would significantly increase stockholder value.” 52 In October

2014, Dearborn met with a potential financial investor, Party A, and the Company

entered into a confidentiality agreement with Party A one month later.53 Party A

expressed interest at $2.60 per share during a month when the Company’s common

49
   Id.
50
   Id.
51
   Proxy at 19.
52
   Id.
53
   Id.

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stock traded in a range of $2.76 to $3.40 per share.54 The Company determined it

could not reach an agreement with Party A. 55

       In early 2015, Ferro and senior management developed a business strategy

code-named “eMed” that “would utilize the Company’s access to medical diagnostic

images and the availability of cheaper and faster computing and artificial

intelligence capabilities to develop a new business line for the Company.”56 Ferro

sought investors and potential business partners for the eMed idea, reaching out to

several industry participants, including IBM.57

       Ferro, Jon Devries, a Vice President in the Company, and Dearborn met with

IBM representatives and discussed the eMed idea at an industry conference on April

13, 2015.58 In May 2015, IBM expressed an interest in acquiring Merge.59 On July

7, 2015, IBM “submitted an exclusivity agreement” reflecting a proposed offer of

$5.65 per share in cash that was conditioned on an exclusivity agreement and

employment and retention arrangements with certain members of the Company’s

management.60 After meeting on July 9, 2015, the Board told Ferro and Dearborn

to convey to IBM that it was unwilling to enter into an exclusivity agreement at the

54
   Id.
55
   Id.
56
   Compl. ¶ 74.
57
   Compl. ¶ 76; Proxy at 20.
58
   Compl. ¶ 78; Proxy at 20.
59
   Compl. ¶ 78.
60
   Id. at ¶ 81.

                                         9
proposed price of $5.65. 61 The Board also authorized Ferro and Dearborn to enter

into an “appropriate” exclusivity agreement if IBM raised its proposed purchase

price in such a way “that better reflected [the Board’s] view of [the Company’s]

value. . . .”62 Accordingly, “on July 10, 2015, Ferro and Dearborn entered Merge

into an exclusivity agreement with IBM at a proposed purchase price of $1 billion,

or $7.00 per share.”63 The exclusivity agreement would last until August 27, 2015.64

The Board met on July 14, 2015 and reviewed the interest levels of other potential

buyers.65 Company counsel also reviewed the directors’ fiduciary duties.66 During

the week of July 24, 2015, legal counsel to IBM, Merge, and Ferro/Merrick began

negotiating terms of a merger agreement. 67 Also during this week, the Board, senior

management, and Company counsel discussed forming a special committee “that

would not include Ferro to negotiate the Merger with IBM in light of the payment

that would become due under the [Consulting Agreement].”68 Ultimately, the Board

declined to form such a committee, an act the Plaintiffs allege was against the wishes

of counsel.69 On July 29, 2015, “Ferro suggested that if IBM were willing to increase

61
   Proxy at 21.
62
   Id.
63
   Compl. ¶ 83.
64
   Proxy at 22.
65
   Compl. ¶ 84.
66
   Proxy at 22.
67
   Compl. ¶ 85.
68
   Id. at ¶ 89 (emphasis added).
69
   Id.

                                         10
its offer price, Merrick would consider waiving” the $15 million Consulting

Agreement Fee.70 IBM obliged, increasing its offer from $7.00 to the final deal price

of $7.13 per share, representing a $15 million increase, and Ferro agreed to waive

the $15 million consulting fee if the Company entered into the Merger with IBM. 71

The Board met on August 5, 2015 to consider and vote on IBM’s proposal, if

appropriate.72 Goldman presented a fairness opinion to the Board stating that the

$7.13 per share offer was “fair from a financial point of view.” 73 Company counsel

reviewed the terms of the Merger Agreement with the Board, as well as the Board’s

fiduciary duties yet again.74 After “further review and discussion,” the Board

“resolved to approve” the Merger Agreement and recommend that the Company

stockholders approve the Merger Agreement. 75 Dearborn recused himself from the

vote due to negotiating post-closing employment with IBM.76 The Board caused the

Company to enter into the Merger Agreement on August 6, 2015, and the Merger

was completed on October 13, 2015.77 77.3% of the Company’s outstanding shares

70
   Id. at ¶ 90.
71
   Id. at ¶¶ 90–91.
72
   Proxy at 24.
73
   Id.
74
   Id. at 25.
75
   Id.
76
   Id.
77
   Compl. ¶ 2.

                                         11
were voted in favor of the Merger.78 The Defendants filed a definitive proxy

statement in connection with the Merger.79

              4. The Deal Protections

       The Merger Agreement included certain deal protections. 80                     A “no-

solicitation” provision prohibited the Company from shopping itself. 81                    An

“information rights” provision required the Company to notify IBM within twenty-

four hours upon the receipt of an inquiry from an unsolicited bidder that may lead to

a superior proposal.82 The Board retained the right to change its recommendation in

connection with a superior proposal if the Board determined in good faith that the

failure to do so would be reasonably likely to result in a breach of the Board’s

fiduciary duties.83 However, a “force-the-vote” provision required the Board to

submit the Merger to a stockholder vote even if the Board no longer recommended

the Merger or even recommended against it. 84 Also, a “matching rights” provision

gave IBM five business days to match any superior proposal. 85 Finally, the Merger

78
   Defs’ Opening Br., Transmittal Aff. of D. McKinley Measley, Esq., Ex. 6, 10/14/2015 Merge
Form 8-K at 2.
79
   Compl ¶ 117.
80
   Id. at ¶ 22.
81
   Id. During negotiations, IBM consistently refused to allow a go-shop provision. Proxy at 23.
82
   Compl. ¶ 22.
83
   Proxy at 27.
84
   Compl. ¶ 110.
85
   Id. at ¶ 22.

                                              12
Agreement included a termination fee of up to $26 million, which would be paid to

IBM “if the Company terminated the Merger Agreement to pursue another offer.”86

              5. Goldman’s Fairness Opinion

       In conducting its fairness opinion, Goldman relied on financial projections

created by Company management for the purpose of evaluating the Merger.87 As

part of its analysis, Goldman valued the Company’s Net Operating Losses (“NOLs”)

at $0.59 per share, treated stock-based compensation (“SBC”) as a cash expense, and

used an unadjusted historical beta for the Company of 1.38. 88 Goldman has done

business with IBM and disclosed the extent of these past dealings on August 5,

2015—one day before the Company entered into the Merger Agreement. 89 Goldman

also earned $13 million from its engagement, “all of which was contingent upon the

consummation of the Merger.”90

       D. Procedural History of the Consolidated Action

       This Memorandum Opinion addresses five related actions that have been

consolidated.

86
   Id.
87
   Id. at ¶ 101.
88
   Id. at ¶ 102. But see Pls’ Answering Br. 25–26 (alleging that Goldman did not use managements’
projections referred to in the Proxy that treated SBC as a cash expense but instead used a set of
UFCF projections that did not treat SBC as a cash expense).
89
   Compl. ¶ 14, 99.
90
   Compl. ¶ 15.

                                               13
          The initial plaintiff filed his original Verified Class Action Complaint on

August 13, 2015, just one week after the Board announced the Merger, seeking to

enjoin the Merger. On September 18, 2015, the Defendants moved to dismiss or

stay this matter pending the completion of a related matter in Illinois also seeking to

enjoin the Merger (the “Illinois Action”).91 On September 30, 2015, the initial

plaintiff, along with four other plaintiffs in related Delaware actions, moved to

consolidate and appoint lead counsel, which I granted on October 6, 2015. I heard

argument on Defendants’ Motion to Dismiss or Stay this action in favor of the

Illinois Action on October 27, 2015, after which I denied Defendants’ Motion.

          On November 19, 2015, the Plaintiffs moved for leave to file an amended

complaint.       On December 4, 2015, the Defendants moved to proceed in one

jurisdiction and to dismiss or stay in the other jurisdiction, asking this Court and the

Illinois Court to confer and decide the appropriate forum for the litigation.

Thereafter, the matter moved forward here.

          I granted Plaintiffs’ motion for leave to file an amended complaint on January

7, 2016 and the Plaintiffs filed their Verified Consolidated Amended Class Action

Complaint (the “Complaint”) on February 8, 2016. Count I is a claim for breach of

fiduciary duties against the Defendants.92 The Plaintiffs allege that the Defendants

91
     See Hazen v. Merge Healthcare, Inc., No. 2015-CH-12090 (Ill. Cir. Ct.).
92
     Id. at ¶¶ 137–144.

                                                14
have violated their “duties of care, loyalty, and independence” to the Company’s

stockholders by putting their personal interests first, entering into the Merger

through an unfair process, and depriving stockholders of the “true value inherent in

and arising from” the Company.93 Count II is a claim for breach of the fiduciary

duty of disclosure against the Defendants in which the Plaintiffs allege that the

Defendants, acting in bad faith, “caused materially misleading and incomplete

information to be disseminated” to the stockholders and that the Proxy failed to

disclose material information.94 Count III was a claim for aiding and abetting

breaches of fiduciary duty against Goldman, which has since been withdrawn. The

Plaintiffs seek a quasi-appraisal remedy and compensatory damages.                The

Defendants moved to dismiss on February 19, 2016 under Court of Chancery Rule

12(b)(6) for failure to state a claim. I heard oral argument on the Motion to Dismiss

on September 27, 2016, after which the parties completed supplemental briefing.

This Memorandum Opinion addresses Defendants’ motion.

                                    II. ANALYSIS

          The Defendants move to dismiss the Complaint pursuant to Court of Chancery

Rule 12(b)(6). When evaluating a motion to dismiss under 12(b)(6), the Court

accepts well-pleaded factual allegations as true, drawing all reasonable inferences in

93
     Id.
94
     Id. at ¶¶ 145–149.

                                          15
favor of the plaintiff. 95 The Court must deny the motion unless “the plaintiff could

not recover under any reasonably conceivable set of circumstances susceptible of

proof.”96    Moreover, the Defendants here rely on the cleansing effect of the

stockholders’ vote ratifying the transaction. To the extent the Plaintiff has alleged

that the vote was uninformed, the Defendants bear the burden to show that the

deficiencies alleged are spurious or immaterial as a matter of law.97

       The Plaintiffs argue that the entire fairness standard of review applies to the

Merger because a majority of the Merge board was conflicted. 98 The Plaintiffs

contend that this conflict stems from “Ferro’s desire to exit his Merge investment”

and that all but one member of the Board was beholden to Ferro through their

relationships with him.99 The Plaintiffs also argue that these relationships with other

Board members combined with Ferro’s 26% stock ownership allowed him to control

the Company.100 Because I find that a fully informed, uncoerced vote of the

Company’s disinterested stockholders cleansed the Merger here, resulting in the

application of the business judgment rule, I need not conduct an entire fairness

analysis. To be clear, the Plaintiffs assert two related sources of injury—price and

95
    Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536 (Del.
2011).
96
   Id.
97
   See In re Solera Holdings, Inc. Stockholder Litig., 2017 WL 57839, at *8 (Del. Ch. Jan. 5, 2017).
98
   Pls’ Answering Br. 40.
99
   Id. at 40–41.
100
    Id. at 41–43.

                                                16
process claims arising from the merger, and disclosure-inadequacy claims that

allegedly misled stockholders into voting for the merger and forgoing appraisal

rights; the former are cleansed, and the latter mooted, by a finding of adequate

disclosures to stockholders.

         A. The Stockholder Vote Cleansed the Merger

         Here, even if the stock affiliated with Ferro is taken from the calculation, a

majority of the stock held by disinterested stockholders voted for the Merger. It is

worth, I think, examining the rationale whereby such a vote—if uncoerced and

informed—cleanses price and process claims in the merger context. Why should the

Court dismiss a case where a sub-optimal sales process is credibly alleged?

         The common law of Delaware, generally speaking, supports property rights

and private ordering, whereby assets may be assigned to highest use. Thus, in the

context of an individually-owned asset, the parties are free to negotiate a sales price

without Court oversight; such self-ordering is so ingrained that the very idea of

interference in such an exchange is largely unexamined. The common law of

corporations concerns itself with such exchanges because of agency problems:

where directors sell a corporate asset, ownership and control—and, potentially,

interests—diverge; and the presence of a judicial referee is necessary to watch the

watchmen. Thus, in the merger context, the Court will examine, 101 post-closing, the

101
      Assuming an adequate complaint.

                                           17
compliance of the directors with their fiduciary duties in regard to the sale, duties

themselves imposed to cure the agency problem described above. However, where

a majority of the disinterested ownership of the corporate asset approves the

transaction, in a manner both uncoerced and informed, the agent/principal conflict

with directors is ameliorated, and the need for judicial oversight of the agents is

reduced concomitantly.102 Of course, another agency relationship, the majority

dragging along the minority, remains; however, because the interests of the

unaffiliated stockholders tend to be aligned, that relationship is less problematic, and

is addressed statutorily via appraisal.

      The cleansing effect on a transaction of a majority vote of disinterested

corporate stock was explained by our Supreme Court in Corwin v. KKR Financial

Holdings LLC.103 “Delaware corporate law has long been reluctant to second-guess

the judgment of a disinterested stockholder majority that determines that a

transaction with a party other than a controlling stockholder is in their best

interests.”104 Accordingly, “when a transaction not subject to the entire fairness

standard is approved by a fully informed, uncoerced vote of the disinterested

stockholders, the business judgment rule applies.”105

102
     See generally Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 313–14 (Del. 2015)
(discussing policy).
103
    125 A.3d 304 (Del. 2015).
104
    Id. at 306.
105
    Id. at 309 (internal citations omitted).

                                          18
       The Plaintiffs point to the language from Corwin quoted above to argue that

if they have simply pled an entire fairness case, no cleansing is possible.106

However, the cleansing doctrine has subsequently been clarified by this Court: as

the Chancellor recently noted, “the Supreme Court did not intend [by the language

quoted above] to suggest that every form of transaction that otherwise may be subject

to entire fairness review was exempt” from cleansing by vote.107 Instead, as clarified

in a learned discussion by Vice Chancellor Slights in Larkin v. Shah,108 “the only

transactions that are subject to entire fairness that cannot be cleansed by proper

stockholder approval are those involving a controlling stockholder.”109 Importantly,

the mere presence of a controller does not trigger entire fairness per se.110 Rather,

coercion is assumed, and entire fairness invoked, when the controller engages in a

conflicted transaction, which occurs when a controller sits on both sides of the

transaction, or is on only one side but “competes with the common stockholders for

consideration.”111 In these scenarios, “[c]oercion is deemed inherently present,”

106
     See Oral Arg. Tr. 36:16–37:4 (Sept. 27, 2016).
107
     Solera, 2017 WL 57839, at *6 n.28 (citing Larkin v. Shah, 2016 WL 4485447, at *10 (Del. Ch.
Aug. 25, 2016)).
108
     2016 WL 4485447 (Del. Ch. Aug. 25, 2016).
109
     Id. at *10.
110
     Id. at *8. See Kahn v. M & F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014) (“[E]ntire fairness
is the highest standard of review in corporate law. It is applied in the controller merger context as
a substitute for the dual statutory protections of disinterested board and stockholder approval,
because both protections are potentially undermined by the influence of the controller. However
. . . that undermining influence does not exist in every controlled merger setting, regardless of the
circumstances.”).
111
     Larkin, 2016 WL 4485447, at *8.

                                                19
unlike “in transactions where the concerns justifying some form of heightened

scrutiny derive solely from board-level conflicts or lapses of due care.” 112 Thus,

“[i]n the absence of a controlling stockholder that extracted personal benefits,” if a

majority of the Company’s disinterested stockholders approves the transaction with

a fully informed, uncoerced vote, then the business judgment rule applies “even if

the transaction might otherwise have been subject to the entire fairness standard due

to conflicts faced by individual directors.”113 Moreover, “[w]hen the business

judgment rule standard of review is invoked because of a vote, dismissal is typically

the result. That is because the vestigial waste exception has long had little real-world

relevance, because it has been understood that stockholders would be unlikely to

approve a transaction that is wasteful.”114

       The Plaintiffs argue that entire fairness applies because a majority of the

Board is conflicted, which as discussed above can be cleansed with an informed

vote, but in doing so the Plaintiffs point to Ferro’s control and/or desire for liquidity

as the cause of the conflicted Board. Given the recent and on-going development of

this Court’s cleansing jurisprudence, I give the Plaintiffs here the benefit of the

doubt; I infer from Plaintiffs’ arguments that they have adequately presented for

consideration here the contention that entire fairness applies—and that cleansing is

112
    Id. at *12.
113
    Id. at *1 (emphasis added).
114
    Singh v. Attenborough, 137 A.3d 151, 151–152 (Del. 2016).

                                             20
unavailable—because Ferro was a controlling stockholder.                However, even

assuming Ferro was a controlling stockholder, I find that he did not extract any

personal benefits because his interests were fully aligned with the other common

stockholders. Additionally, for the reasons that follow, I find that the disinterested

stockholder vote was fully informed. Therefore, I find that the business judgment

rule applies to the Merger and, since the Plaintiffs do not allege waste, the Complaint

must be dismissed.

                 1. Even if Ferro was a controller, he did not extract any personal
                 benefits.

          The Plaintiffs argue that the Company’s own 10-K shows Ferro is a controller.

As referenced above, the Company’s December 31, 2014 10-K states

          Mr. Ferro indirectly owns or controls all of the shares of our common
          stock owned by Merrick Ventures and Merrick Holdings. Due to their
          stock ownership, Merrick Ventures and Merrick Holdings have
          significant influence over our business, including the election of our
          directors. . . . Merrick Ventures’ and Merrick Holdings’ significant
          ownership of our voting stock will enable it to influence or effectively
          control us and the influence of our large stockholders could impact our
          business strategy and also have the effect of discouraging others from
          purchasing or attempting to take a control position in our common
          stock, thereby increasing the likelihood that the market price of our
          common stock will not reflect a premium for control. 115

          The Plaintiffs further point towards Ferro’s “longstanding business and other

relationships” with “all but one member of the Board.” 116 For purposes of this

115
      Compl. ¶ 69 (emphasis in original).
116
      Pls’ Answering Br. 42–43.

                                             21
Memorandum Opinion, I assume, without finding, that Ferro—despite indirect

ownership of only 26% of Merge stock—was a controller.117 The crux of rebutting

a cleansing vote at the pleading stage, however, lies not merely in showing that a

controller exists, but in pleading facts making it reasonably conceivable that a

controller’s interest was adverse to the other stockholders, as where the controller

“extracted personal benefits.”118

       The Plaintiffs allege that Ferro “controlled and manipulated the sales process

to obtain considerable financial benefits and career prospects for himself and his

affiliates, including the majority of Merge’s Board,” not shared with the Company’s

other stockholders.119 Specifically, the Plaintiffs argue that Ferro used his control to

ensure a “quick exit” from his illiquid block of Merge stock and to have the Board

approve the Consulting Agreement Fee of $15 million to Merrick if Merge was sold

for over $1 billion. 120

       Regarding alleged liquidity “benefits,” this Court has previously explained

that

       a fiduciary's financial interest in a transaction as a stockholder (such as
       receiving liquidity value for her shares) does not establish a disabling
       conflict of interest when the transaction treats all stockholders equally
       . . . . This notion stems from the basic understanding that when a
117
    I note, moreover, that companies should be wary of making disclosures for securities law
purposes while simultaneously asserting to the contrary for purposes of Delaware law.
118
    Larkin, 2016 WL 4485447, at *1 (“In the absence of a controlling stockholder that extracted
personal benefits . . . .”) (emphasis added).
119
    Compl. ¶ 68.
120
    Pls’ Answering Br. 46.

                                              22
       stockholder who is also a fiduciary receives the same consideration for
       her shares as the rest of the shareholders, their interests are aligned.121

       The Plaintiffs appear to concede this point, stating that “stock ownership

generally aligns a director or officer’s interests with other stockholders when they

own ‘material’ amounts of stock.”122 The Plaintiffs, however, argue that “those

interests diverge when the director or officer wants to exit their investment but their

holdings are [so] large that they cannot be quickly sold in the open markets.”123 It

is true that exigent circumstances that require a controller to dump stock, for liquidity

purposes, at less than full value, create divergent interests between the controller and

the other stockholders. A simple interest in selling stock on the part of the controller,

by contrast, is insufficient to demonstrate divergent interests. In order for such a

situation to constitute a disabling conflict, a controller must not only seek liquidity

but the circumstances under which she does so must be akin to a “crisis” or a “fire

sale” to “satisfy an exigent need.”124

       The Complaint states that Ferro has been slowly selling his stock for the past

six years, which, to my mind, severely discredits any claims of a fire sale or a severe

liquidity crunch. At any rate, the Plaintiffs conceded at Oral Argument that there is

nothing in the Complaint alleging Ferro is in financial distress and that they do not

121
    In re Synthes, Inc. S'holder Litig., 50 A.3d 1022, 1035 (Del. Ch. 2012) (emphasis added).
122
    Pls’ Answering Br. 45.
123
    Id.
124
    In re Synthes, 50 A.3d at 1036.

                                               23
allege a “fire sale” situation. 125 As such, and in light of my discussion below

regarding the Consulting Agreement Fee, it seems to me that Ferro’s interest here as

a 26% stockholder is fully aligned with stockholders’ interest to obtain the highest

price possible, notwithstanding his interest, as demonstrated by a long course of

dealing, in liquidating his stock.

          The Plaintiffs also argue that the Consulting Agreement Fee provided a

personal incentive to Ferro to place a $1 billion cap on the Merger. In the first

instance, this allegation has the situation precisely backward; the Consulting

Agreement Fee gave Ferro a $15 million extra incentive to want a $1 billion floor,

not a cap, after which point he had the same incentive to maximize price as did the

other stockholders. In any event, acting against his financial interest, Ferro waived

this fee contractually owed to him and thus removed any personal benefit from it.

He instead took the same consideration as the other stockholders and IBM increased

its offer by the amount of the waived Consulting Agreement Fee. In other words,

Ferro essentially forwent the full $15 million and shared it pro rata with the other

stockholders of the Company. The Plaintiffs argue that this waiver came too late

and that the sale process here was already “poisoned” by the existence of this fee. 126

It seems beyond the limits of common-sense, however, that Ferro, as the Company’s

125
      See Oral Arg. Tr. 57:22–58:11 (Sept. 27, 2016).
126
      Pls’ Answering Br. 47.

                                                 24
largest stockholder, would stop at negotiating a price of $1 billion for the Company

and ignore other willing buyers if the possibility of obtaining an even higher deal

price existed. Rather, to my mind, Ferro’s waiver of the Consulting Agreement Fee

fully aligned his interest with the other stockholders of the Company.127 I note that,

as a stockholder, Ferro would receive $188 million on the sale, dwarfing the

consulting fee.128

       For the foregoing reasons, I find that it is not reasonably conceivable that

Ferro, assuming he was a controller, extracted any personal benefits. Therefore, the

stockholder vote here cleanses the Merger if that vote was fully informed.

               2. The stockholder vote approving the Merger was fully informed.

       A plaintiff alleging that a stockholder vote was inadequately informed to

cleanse a transaction must “identify a deficiency in the operative disclosure

document,” which shifts the burden to the defendants to show that “the alleged

deficiency fails as a matter of law in order to secure the cleansing effect of the

127
    As to Plaintiffs’ vague reference to post-closing “career prospects” that Ferro obtained for
himself and members of the Board, Ferro did not personally obtain post-closing employment and
the only director who did obtain post-closing employment with IBM was also a member of
management and abstained from voting on the Merger. The Plaintiffs concede that retaining
certain management was a condition placed on the deal by IBM. Retaining management, I note,
is a “routine occurrence” under our law in deals of this type and generally should not be viewed
with suspicion. See Morgan v. Cash, 2010 WL 2803746, at *5 (Del. Ch. July 16, 2010). As such,
I find that these alleged “career prospects” enjoyed by others were not personal benefits to Ferro,
and that he was not a conflicted controller.
128
    As a 26% (indirect) stockholder, Ferro was presumably entitled to $260 million on the $1 billon
sale; this apparent discrepancy is not explained in the record.

                                                25
vote.”129 “[W]hen directors solicit stockholder action, they must ‘disclose fully and

fairly all material information within the board’s control.’”130 Obviously, for a

stockholder approval of a transaction to be meaningful, that vote must be based on

an informed understanding of the transaction. This explains this Court’s solicitude

in its jurisprudence regarding a fully informed vote. “Fully informed” does not mean

infinitely informed, however. “The essential inquiry is whether the alleged omission

or misrepresentation is material.”131 Information will be found material if “from the

perspective of a reasonable stockholder, there is a substantial likelihood that it

significantly alters the total mix of information made available.”132 Redundant facts,

insignificant details, or reasonable assumptions need not be disclosed. 133 Nor must

information be disclosed simply because a plaintiff alleges it would be helpful, or

interesting.134

       In other words, for purposes of rebutting any cleansing effect here at the

motion to dismiss stage, plaintiffs must sufficiently allege facts that make it

reasonably conceivable that the disclosures were materially misleading in some

129
    In re Solera, 2017 WL 57839, at *8.
130
    Id. at *9 (quoting Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992)).
131
    Id. at *9.
132
    In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 899 (Del. Ch. 2016) (internal quotation
omitted).
133
    See Abrons v. Maree, 911 A.2d 805, 813 (Del. Ch. 2006).
134
    See Dent v. Ramtron Int'l Corp., 2014 WL 2931180, at *10 (Del. Ch. June 30, 2014).

                                              26
regard; thus leading to an uninformed vote.135 The Plaintiffs have the pleading

burden to allege material deficiencies; and I consider only the deficiencies alleged

in the Complaint here. 136 Plaintiffs’ alleged disclosure violations are contained

within two broad categories: the summary of Goldman’s financial analysis and

Ferro’s decision to waive the Consulting Agreement Fee contractually owed to him.

The Plaintiffs also raise various other disclosure claims in their Complaint, such as

failing to disclose in the Proxy that Ferro attempted to sell his shares in 2014. 137 The

Plaintiffs do not address these points in their Answering Brief, so I consider them

waived. 138

       The Defendants initially argue that the Plaintiffs should be precluded from

pursuing any post-closing disclosure claims because—although the Plaintiffs had

the opportunity to proceed before the merger—they failed to seek correction of the

alleged deficient disclosures via pre-merger injunction.139 The Defendants here

make a policy argument that this Court should foster an incentive system to promote

135
    It is worth noting at the outset that the Plaintiffs do not contend that the Defendants failed to
disclose the conflicts of interest they allege, with the exception of those discussed infra. See
Corwin, 125 A.3d at 312 (“[I]f troubling facts regarding director behavior were not disclosed that
would have been material to a voting stockholder, then the business judgment rule is not
invoked.”).
136
    In re Solera, 2017 WL 57839, at *8.
137
    Compl. ¶ 119.
138
    See Forsythe v. ESC Fund Mgmt. Co. (U.S.), Inc., 2007 WL 2982247, at *11 (Del. Ch. Oct. 9,
2007) (“The plaintiffs have waived these claims by failing to brief them in their opposition to the
motion to dismiss.”) (citing Emerald Partners v. Berlin, 2003 WL 21003437, at *43 (Del. Ch. Apr.
28, 2003) (explaining “[i]t is settled Delaware law that a party waives an argument by not including
it in its brief”)).
139
    Defs’ Opening Br. 18.

                                                27
an informed stockholder vote. The Defendants argue that after Corwin, plaintiffs

now have an incentive not to litigate disclosure claims before a stockholder vote but

to wait until post-closing “to challenge the application of the business judgment

rule,”140 thus fostering post-closing litigation instead of promoting an informed vote,

the legitimate goal of the litigation. As I have noted elsewhere, the preferred way of

proceeding is for plaintiffs to bring these claims pre-closing to ensure that

stockholders can exercise their right to a fully informed vote. 141 Damages arising

from disclosure deficiencies can be remedied post-close, but the stockholders’ right

to a fully informed vote cannot. 142          In light of the evolving nature of our

jurisprudence, I decline to consider these policy issues here, and assume that the

Plaintiffs may proceed with these claims post-closing.

                      a. Summary of Goldman’s Financial Analysis

       The Plaintiffs allege defects in the disclosure regarding Goldman’s financial

analysis. “[S]tockholders are entitled to receive in the proxy statement a fair

summary of the substantive work performed by the investment bankers upon whose

advice the recommendations of their board as to how to vote on a merger or tender

rely.”143 This fair summary is just that, a summary. 144 Its essence is “not a

140
    Id. at 20.
141
    See Nguyen v. Barrett, 2016 WL 5404095, at *6 n.56 (Del. Ch. Sept. 28, 2016).
142
    Id. at *7.
143
    In re Trulia, 129 A.3d at 900 (internal quotations omitted).
144
    Id.

                                              28
cornucopia of financial data, but rather an accurate description of the advisor’s

methodology and key assumptions.” 145         “[D]isclosures that provide extraneous

details do not contribute to a fair summary. . . .”146 In other words, the summary

must be sufficient for the stockholders to usefully comprehend, not recreate, the

analysis.

       The Plaintiffs allege in the Complaint that the Proxy 1) fails to disclose that

Goldman treated SBC as a cash expense and 2) inadequately describes the present

value of the Company’s NOLs. The Plaintiffs also argue in their Answering Brief,

but not in the Complaint, that the Unlevered Free Cash Flows (the “UFCFs”) actually

used by Goldman were not the UFCFs that the Proxy discloses that Goldman used.

                          i. UFCF and SBC

       The Plaintiffs’ allegations concerning the UFCFs disclosed in the Proxy have

been somewhat of a moving target throughout this litigation. The Plaintiffs first

allege in their Complaint that Goldman understated Merge’s value in its Discounted

Cash Flow (“DCF”) analysis by “atypically” treating SBC as a cash expense and that

the Proxy fails to disclose this fact. 147 However, the Proxy discloses: (1) the

Company’s UFCF projections,148 (2) that Goldman used these projections, 149 and (3)

145
    Id. at 901.
146
    Id.
147
    Compl. ¶¶ 102, 124.
148
    Proxy at 33–34.
149
    Id. at 30.

                                         29
states that in creating these projections, management used GAAP earnings,150 which,

the Defendants point out, requires treatment of SBC as a cash expense.151 The

Plaintiffs argue that this is not adequate and the treatment of SBC as a cash expense

should have been expressly disclosed. I disagree. Assuming for purposes of this

argument that the accounting treatment of SBC would be material to stockholders, I

find the disclosures here adequate. The Proxy discloses adjustments made to GAAP

earnings in reaching the UFCF projections, but does not mention any adjustment for

SBC despite discussing a handful of adjustments for other line-items. Generally, if

a disclosure does not explicitly state that a Board took a certain action, a reader can

infer that such action did not occur. 152 Thus, I find that the Proxy adequately

discloses that Goldman treated SBC, consistent with GAAP, as a cash expense.

       Subsequent to the filing of the Motion to Dismiss, presumably in light of the

Opening Brief, the Plaintiffs have apparently changed their mind over Goldman’s

treatment of SBC, alleging for the first time in their Answering Brief that Goldman

150
    Id. at 34 (“Non-GAAP EBIT consists of GAAP earnings before interest and taxes plus
restructuring and acquisition-related charges. . . . Unlevered free cash flow was calculated by
adding back to tax-effected non-GAAP EBIT depreciation and amortization, adding or subtracting
changes in working capital and subtracting capital expenditures and capitalized software.”).
151
    See Defs’ Reply Br. 9. See also Shaev v. Adkerson, 2015 WL 5882942, at *11 n.105 (Del. Ch.
Oct. 5, 2015) (“Financial accounting standards are . . . subject to judicial notice . . . [s]uch
accounting standards require same-period expensing of stock and option grants.”) (citations
omitted); (Statement of Financial Accounting Standards No. 123 (revised 2004) (“This Statement
requires that the cost resulting from all share-based payment transactions be recognized in the
financial statements.”); Financial Accounting Standards Board, Accounting Standards
Codification § 718-10-25-2 (requiring entities to “recognize the services received in a share-based
payment transaction with an employee as services are received”).
152
    See In re Sauer-Danfoss Inc. Shareholders Litig., 65 A.3d 1116, 1132 (Del. Ch. 2011).

                                                30
used a set of UFCF projections that instead treated SBC as a non-cash expense.153

In making this latter argument in their Answering Brief, the Plaintiffs cite to a

presentation to the Board (seemingly obtained in discovery in the Illinois Action)

and allege that there were two different sets of UFCF projections included in this

presentation. 154 One set of projections treated SBC as a cash expense, while the

other did not. The Plaintiffs belatedly allege that, despite the Proxy’s disclosure to

the contrary, Goldman actually used the projection set that treated SBC as a non-

cash expense.155 In other words, the Plaintiffs allege that the Proxy contains not just

a misleading or incomplete disclosure, but a false statement of fact.

       As an initial matter, I note that Plaintiffs’ allegations here rely heavily, if not

entirely, on a final presentation to the Board by Goldman apparently obtained during

discovery in the Illinois Action. This presentation is not contained in the Proxy, nor

is it explicitly referenced in Plaintiffs’ Complaint. The Plaintiffs contend that the

presentation should be deemed to be implicitly incorporated by reference in the

Complaint, and argue that the Defendants have conceded as much by contending, in

the briefing, that the Plaintiffs must have relied on the presentation to construct their

Complaint.156 The fundamental problem here, however, is the fact that Plaintiffs’

153
    Pls’ Answering Br. 25–26.
154
    Id.
155
    Id.
156
    See Pls’ Supplemental Br. 3 n.2–3.

                                           31
Complaint fails to mention these two cryptic UFCF projection sets, and failed to

allege that Goldman used the set that treated SBC as a non-cash expense. In fact,

Plaintiff’s Complaint makes precisely the opposite allegation, that Goldman treated

SBC as a cash expense, but failed to adequately disclose that fact.157 That was the

allegation the Defendants were required to address in the Motion to Dismiss; they

did so, I have found, adequately. The Plaintiffs seek to shift ground and argue to the

contrary, but may not do so based on the Complaint and the Motion to Dismiss. The

Plaintiffs, alternatively, seek leave to amend their Complaint. However, Court of

Chancery Rule 15(aaa) bars any such amendment here. 158 The Plaintiffs could have

sought to amend upon receiving Defendants’ Motion to Dismiss, but instead they

chose to answer the Defendants’ Motion and in doing so assert an additional, and

contradictory, argument. Accordingly, I find no fault in the Proxy’s disclosure of

the UFCF projections used by Goldman.

       The Plaintiffs also argue that the Board was required to disclose the

Company’s projections for SBC for 2015 through 2019, claiming that these

projections are “material” for stockholders “to have a fair summary of the

Company’s historical and projected financials and the financial analyses performed

157
   Compl. ¶ 102.
158
   See Ct. Ch. R. 15(aaa) (“Notwithstanding subsection (a) of this Rule, a party that wishes to
respond to a motion to dismiss under Rules 12(b)(6) or 23.1 by amending its pleading must file an
amended complaint, or a motion to amend in conformity with this Rule, no later than the time such
party's answering brief in response to either of the foregoing motions is due to be filed.”).

                                               32
by Goldman.”159        Further, the Plaintiffs argue that without such information,

“stockholders could not calculate the Company’s actual UFCFs that were used in

Goldman’s DCF analysis and, therefore, could not accurately value Merge or its

future prospects to determine whether to seek appraisal.” 160 However, “a disclosure

that does not include all financial data needed to make an independent determination

of fair value is not per se misleading or omitting a material fact . . . .”161 Under the

facts alleged here, I find that the Proxy sufficiently provides a fair summary of the

work performed by Goldman and further projections of SBC are not necessary. The

Proxy provides a detailed summary of Goldman’s work, including projections for

Revenue, Gross Profit, EBITDA, EBIT, Net Income, Earnings Per Share, and

UFCF.162 Therefore, to my mind, it is not reasonably conceivable that the actual

projections of SBC, while they might be of interest to stockholders, are necessary

for a fair summary of Goldman’s work in light of the disclosures actually made.

                             ii. NOLs

       The Plaintiffs allege that the Defendants failed to disclose the present value

of Merge’s NOLs, which according to the Plaintiffs was $0.58 per share.163 The

159
    Compl. ¶ 128.
160
    Pls’ Answering Br. 32.
161
    Nguyen v. Barrett, 2015 WL 5882709, at *4 (Del. Ch. Oct. 8, 2015), appeal refused, 146 A.3d
1072 (Del. 2015).
162
    Proxy at 28–35.
163
    Pls’ Answering Br. 32–33. There is a slight discrepancy regarding the alleged value of the
NOLs. Plaintiffs’ Complaint states the present value of the NOLs was $0.59 per share while their
briefing gives a value of $0.58 per share. See Compl. ¶ 102; Pls’ Answering Br. 32–33.

                                              33
Proxy does not disclose a separate value for NOLs but does state that “[t]he present

value of net operating losses was calculated using a discount rate of 7.0%, which

reflects our cost of debt.” 164 Again citing the final presentation Goldman made to

the Board, which is not in the Proxy or explicitly referenced in the Complaint, the

Plaintiffs assert that the NOLs were valued separately and that Goldman, using the

7.0% discount rate, reached a value for the Company’s NOLs of $0.58 and

incorporated this value into its DCF. 165 According to the Plaintiffs, the present value

of the Company’s NOLs must be disclosed as a “key input” pursuant to In re

Netsmart Technologies, Inc. Shareholders Litigation.166 The Plaintiffs contend that

the present value of NOLs is important because of its “substantial impact” on the

value reached in Goldman’s DCF analysis.167            Netsmart, however, does not

specifically address NOLs and merely states that “when a banker's endorsement of

the fairness of a transaction is touted to shareholders, the valuation methods used to

arrive at that opinion as well as the key inputs and range of ultimate values generated

by those analyses must also be fairly disclosed.”168 The Defendants, to my mind,

have provided such key inputs.        As previously discussed, the Proxy provides

projections for Revenue, Gross Profit, EBITDA, EBIT, Net Income, Earnings Per

164
    Proxy at 30.
165
    Pls’ Answering Br. 33.
166
    924 A.2d 171 (Del. Ch. 2007); Pls’ Answering Br. 33.
167
    Pls’ Answering Br. 34.
168
    In re Netsmart Techs., Inc. Shareholders Litig., 924 A.2d 171, 203–04 (Del. Ch. 2007)
(emphasis added).

                                           34
Share, and UFCF. 169 Again, to repeat my reasoning regarding the separate projection

of SBC above, “all financial data needed to make an independent determination of

fair value” is not required; moreover, “[t]he fact that the financial advisors may have

considered certain non-disclosed information does not alter this analysis.”170 I fail

to see how the separate disclosure of the present value of NOLs under the facts here

would alter the total mix of information available to the stockholders given the

detailed fair summary of Goldman’s work already contained in the Proxy. It may

be of interest to stockholders, but its absence is not material. Accordingly, I find the

Proxy sufficient in its description of how Goldman calculated the Company’s DCF

value.

         The Plaintiffs also argue that Merge’s CFO himself did a valuation of the

NOLs, calculating a value of $2 per share. The Plaintiffs appear to base this

allegation on an e-mail from the Company’s CFO, again seemingly produced during

discovery in the Illinois Action and used as an exhibit in deposing an employee of

Goldman Sachs in that action. In that deposition, which I find incorporated as

integral to the Complaint,171 the Goldman Sachs’ employee explained that this $2.00

valuation was based on a potential transaction with a Canadian company and was

169
    Proxy at 28–35.
170
    Nguyen v. Barrett, 2015 WL 5882709, at *4 (Del. Ch. Oct. 8, 2015), appeal refused, 146 A.3d
1072 (Del. 2015).
171
    See In re Morton's Rest. Grp., Inc. Shareholders Litig., 74 A.3d 656, n.3 (Del. Ch. 2013)
(discussing incorporating depositions into a complaint). See also Compl. ¶ 14 (Plaintiffs referring
to statements made by this Goldman Sachs employee).

                                                35
specific to that transaction due to the possibility of “sell[ing] off the Canadian legal

entities of Merge that actually have a significant tax yield.”172 Goldman rejected this

assumption.173     To my mind, disclosing a speculative valuation, limited to a

hypothetical Canadian transaction, not relied on by the banker, would not be helpful

to, and may instead mislead, stockholders.

                      b. The Consulting Agreement Fee

       The Plaintiffs argue the Defendants failed to disclose in the Proxy that Ferro

waived the consulting fee “for the purpose of avoiding the creation of a special

committee” and “not for the purpose of obtaining a price increase, as disclosed in

the Proxy.”174     The Proxy discloses that the Board was considering a special

committee “in light of” the Consulting Agreement Fee. The Proxy also discloses

that, during negotiations

       Ferro also suggested that if IBM were willing to increase the price paid
       to all stockholders, [Ferro’s Company] Merrick Ventures would
       consider waiving the contemplated consulting fee of $15 million. . . .
       [L]ater that evening, [IBM e-mailed Dearborn] indicating that IBM
       would raise its price . . . if Merrick Ventures would waive the consulting
       fee.175

The Plaintiffs argue that, even if true, these statements misled stockholders into

thinking that Ferro’s reason for the waiver was a price increase for stockholders, and

172
    Defs’ Reply Br., Transmittal Aff. of D. McKinley Measley, Esq., Ex. 1, Sinclair Dep. at 64:6–
66:13.
173
    See id.
174
    Pls’ Answering Br. 35.
175
    Proxy at 23.

                                               36
cite to Ferro’s deposition testimony from the Illinois Action in which Ferro states

that he and IBM “didn’t want to do a special committee” and that IBM “did not want

a special committee, which [Ferro] agreed with them on.” 176 The Plaintiffs argue

that this shows Ferro’s subjective reason for waiving the Consulting Agreement Fee

was to avoid the creation of a special committee. In other words, the Plaintiffs argue

that Ferro’s intent with respect to the waiver was not to increase the price of the

Merger, as the Plaintiffs allege the Proxy misleadingly suggests, but was simply an

effort by both IBM and Ferro to avoid the creation of a special committee.

       “[D]isclosures relating to the Board's subjective motivation or opinions are

not per se material, as long as the Board fully and accurately discloses the facts

material to the transaction.”177 Put more simply, “[a]sking ‘why’ does not state a

meritorious disclosure claim” under our law. 178 Here, the Proxy disclosed that the

Board was considering a special committee “in light of” the Consulting Agreement

Fee, and disclosed the fact that Ferro waived this fee.179 The Proxy does not disclose,

and was not required to disclose, Ferro’s subjective motivation for waiving the

Consulting Agreement Fee. It does not seem reasonably conceivable to me that an

176
    Transmittal Aff. of Derrick B. Farrell, Esq., Ex. C, Ferro Dep. at 62.
177
    In re MONY Grp., Inc. S'holder Litig., 853 A.2d 661, 682 (Del. Ch. 2004).
178
    See In re Sauer-Danfoss, 65 A.3d at 1131.
179
     See Compl. ¶ 89, Proxy at 23 (“[The Board] was considering the formation of a special
committee to negotiate the proposed merger with IBM in light of the fact that, with the changed
price in the transaction, the Merrick consulting agreement would provide for a $15 million
payment to Merrick Ventures.”) (emphasis added).

                                              37
additional disclosure surrounding Ferro’s alleged subjective motivation for waiving

the Consulting Agreement Fee—a waiver that benefited all stockholders pro rata—

would “alter the total mix of information” available to those stockholders in deciding

whether to approve the Merger.             Accordingly, I find that the Board provided

sufficient information about Ferro’s waiver of the Consulting Agreement Fee.

       The Plaintiffs also argue that the Defendants failed to disclose in the Proxy

that Ferro was willing to waive the Consulting Agreement Fee “for any other

potential purchaser and not just IBM.”180 The Plaintiffs’ argument seems to be that

failure to disseminate such a willingness on Ferro’s part depressed the sales price,

by failing to so inform hypothetical third-party purchasers. I note that a Board owes

no disclosure duty to third parties such as other potential purchasers, especially

speculative potential unknown purchasers such as here.                   Moreover, I am not

convinced that a broad public announcement of Ferro’s willingness to waive his fee

for any bidder would necessarily support a higher sales price.181 More to the point,

however, for purposes of adequate disclosure to cleanse, disclosure to the

180
    Pls’ Answering Br. 35.
181
    The Plaintiffs argue that the market would consider the $15 million Consulting Agreement Fee
as additional to the $26 million termination fee, effectively creating a termination fee of $40
million in the minds of potential bidders. This is dubious, but if true resulted in an aggregate
breakup fee of under 4%, which is not facially unreasonable. Plaintiffs’ argument here would
carry more weight had there been another known bidder waiting in the wings from whom the
Defendants withheld Ferro’s broad willingness to waive his consulting fee. Such facts are not
alleged here, however. In any event, the issue goes to process claims, which I need not reach given
my decision here.

                                                38
stockholders of Ferro’s subjective intent with respect to hypothetical bidders is not

material to the stockholders.

      B. The Business Judgment Rule Applies to the Merger

      Based on the foregoing, the Merger was approved by an uncoerced vote of a

majority of the Company’s disinterested stock, without the presence of a controller

who extracted personal benefits. The Plaintiffs allege that the vote was insufficiently

informed; I find that the Defendants have met their burden, through reference to the

available record, to demonstrate that the vote was informed. Accordingly, the

business judgment rule applies to the Board’s decision to approve the Merger. Since

the Plaintiffs do not allege waste with respect to that decision, the Complaint must

be dismissed under 12(b)(6) for failure to state a claim.

                                III. CONCLUSION

      For the reasons discussed above, Defendants’ Motion to Dismiss is granted.

To the extent the foregoing requires an Order to take effect, IT IS SO ORDERED.

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