December 22, 2014
On December 19, 2014, the Delaware Supreme Court issued a ruling reversing an order of the Court of Chancery granting a preliminary injunction that would have enjoined an agreed-to merger and required a mandatory post-signing 30-day go-shop period. In C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, No. 655/657 (Del. Dec. 19, 2014), the Supreme Court held, among other things, that the Court of Chancery had imposed a non-existent requirement that a selling company must engage in an active market process as a matter of law.
The Transaction. The transaction that gave rise to the lawsuit was a merger between a Delaware corporation, C&J Energy Services, Ltd., and a Bermuda company, a subsidiary of Nabors Industries, Ltd. The merger was structured as an inversion transaction through which C&J would acquire the Nabors subsidiary, and the C&J management team would run the combined entity, but Nabors would retain a majority equity stake in the surviving company.
Prior to entering the deal, the C&J Board did not engage in an active market check, but the Board did negotiate for a standard "fiduciary out" to the non-solicitation clause in the merger agreement to allow C&J to negotiate with third parties under certain circumstances. This was coupled with a "modest" deal termination fee equal to 2.27% of the deal value. The Board also secured several corporate governance protections for C&J shareholders spanning a five-year period, including limits on Nabors’ exercise of control and the right for C&J stockholders to participate pro rata in any sale of the surviving entity.
The Chancery Court Decision. On November 24, 2014, at the conclusion of the preliminary injunction hearing, the Court of Chancery announced its decision from the bench. In assessing the merger process in C&J, the Court of Chancery focused on what it considered a "major problem": the fact that the C&J Board did not approach the merger as a sales process, but instead was focused on a strategic acquisition that happened to turn into a sale due to tax considerations. Accordingly, although the Court of Chancery determined the C&J Board was informed of the company’s value and was not conflicted, it nevertheless concluded that it was "plausible" that the Board transgressed Revlon’s requirement that it seek the highest immediate value reasonably available, because the Board did not have "impeccable" knowledge of the assets of the company acquiring it. Thus, the Court of Chancery enjoined the stockholder vote for 30 days and instructed C&J to actively shop itself during that 30-day period.
The Supreme Court Decision. In an opinion authored by Chief Justice Strine, the Supreme Court, en Banc, unanimously held that a mandatory injunction enjoining the merger was not proper for several reasons:
Accordingly, the Supreme Court reversed the lower court and its entry of a preliminary injunction delaying the shareholder meeting and requiring a go-shop period.
Takeaways. The Supreme Court’s decision in C&J Energy offers important guidance for companies and boards considering change-in-control transactions:
In the face of evolving and multiplying challenges to M&A deals, practitioners can take some comfort in the Chief Justice’s clear guidance that Delaware Courts should be reticent to take decisions on corporate transactions out of the hands of stockholders. This is "especially the case" where stockholders have no alternative bid to consider and have the non-coerced and adequately informed ability to address the harm claimed by Plaintiffs via the simple act of casting a "no" vote.
The opinion is available here.
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