On December 19, 2014, the Delaware Supreme Court reversed a preliminary injunction ordered by the Delaware Court of Chancery in C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employers’ Retirement Trust, No. 655/657, 2014 (Del. Dec. 19, 2014). In C&J Energy, the Chancery Court enjoined a stockholder vote on a proposed merger of C&J Energy Services, Inc. with a subsidiary of Nabors Industries Ltd. The Chancery Court granted plaintiff’s request for injunctive relief finding that C&J Energy’s board of directors had demonstrated a “plausible violation of the board’s Revlon duties” because the C&J Energy board had not conducted an active market check of the company before or after signing the definitive agreement. The Chancery Court entered the injunction even though the C&J Energy board was independent, engaged in a passive market check, fully informed its stockholders with sufficient information to evaluate the transaction, was not faced with a competing proposal and specific contract provisions in the merger-related documents prohibited solicitations of alternative proposals. In reversing the injunction, the Delaware Supreme Court found that the Chancery Court had misapplied the standard of review for granting a preliminary injunction – a “reasonable probability of success on the merits” not a “plausible violation of the board’s Revlon duties.” In so finding, the Supreme Court has provided boards with helpful guidance in terms of its Revlon duties.
The Supreme Court assumed that Revlon applied to the case at hand. Revlon imposes an enhanced level of scrutiny regarding the fiduciary duties of a board of directors considering a change of control transaction. The Supreme Court distinguished the facts in Revlon from the facts presented in C&J Energy: “Revlon involved a decision by a board of directors to chill the emergence of a higher offer from a bidder because the board’s CEO disliked the new bidder, after the target board had agreed to sell the company for cash. Revlon made clear that when a board engages in a change of control transaction, it must not take actions inconsistent with achieving the highest immediate value reasonably attainable.” The Supreme Court noted the Chancery Court’s misapplication of the Revlon line of cases. “Here, the Court of Chancery seems to have believed that Revlon required C&J’s board to conduct a pre-signing active solicitation process in order to satisfy its contextual fiduciary duties.” The Supreme Court held:
“But Revlon and its progeny do not set out a specific route that a board must follow when fulfilling its fiduciary duties, and an independent board is entitled to use its business judgment to decide to enter into a strategic transaction that promises great benefit, even when it creates certain risks. When a board exercises its judgment in good faith, tests the transaction through a viable passive market check, and gives its stockholders a fully informed, uncoerced opportunity to vote to accept the deal, we cannot conclude that the board likely violated its Revlon duties. It is too often forgotten that Revlon, and later cases like QVC, primarily involved board resistance to a competing bid after the board had agreed to a change of control, which threatened to impede the emergency of another higher-priced deal. No hint of such a defensive, entrenching motive emerges from this record.”
The C&J Energy decision provides a reminder to parties of not only the high standard a court must apply before granting a preliminary injunction, but also even under the microscope of the enhanced level of scrutiny imposed by Revlon, there is not a one size fits all test for determining whether a board has fulfilled its fiduciary duties in maximizing the value of a change of control transaction for its shareholders.
For more information please contact Joseph C. Marrow.