• The Court of Chancery Declines an Opportunity to Define More Precisely Revlon's Application to Mixed Stock/Cash Deals
  • November 2, 2009
  • Law Firm: Richards, Layton & Finger, P.A. - Wilmington Office
  • In In re NYMEX S'holder Litig., C.A. No. 3621-VCN (Del. Ch. Sept. 30, 2009), the Court of Chancery declined an opportunity to define more precisely when Revlon scrutiny applies to a mixed cash/stock merger transaction. Rather, the Court dismissed all claims brought by former stockholders of NYMEX Holdings, Inc. ("NYMEX") in connection with the acquisition of NYMEX by an entity controlled by CME Group, Inc. ("CME") pursuant to an exculpatory clause under 8 Del. C. § 102(b)(7) in NYMEX's certificate of incorporation.

    Revlon scrutiny applies when a transaction involves "a fundamental change of corporate control." Stock-for-stock transactions, where control of the corporation remains post-merger in a "large, fluid market," do not trigger Revlon scrutiny. By contrast, in a transaction in which cash is the exclusive consideration paid to the acquired corporation's stockholders, a fundamental change of corporate control occurs and Revlon scrutiny applies. Where the consideration paid involves a mix of cash and stock, Delaware courts have not set forth a bright-line rule providing when Revlon scrutiny is triggered. Here, the consideration being offered to the NYMEX stockholders involved 64% CME stock and 36% cash at the time the NYMEX board approved the merger, and 56% CME stock and 44% cash at the closing of the merger.1 Regardless of whether the percentage split was evaluated at the time the transaction was approved or when the merger closed, the NYMEX consideration fell in between the standards set forth in previous mixed stock/cash transaction cases, which have held that 67% stock and 33% cash did not trigger Revlon scrutiny,2 while 40% stock and 60% cash likely triggered Revlon scrutiny.3

    However, the Court declined to decide in this case whether Revlon scrutiny was triggered because of the exculpatory clause authorized by 8 Del. C. § 102(b)(7) in NYMEX's certificate of incorporation, which protects the directors from personal liability for breaches of the duty of care. Thus, even if Revlon scrutiny applied, the exculpatory clause would result in a dismissal of the claims unless plaintiffs successfully pled a nonexculpated claim for breach of the fiduciary duty of loyalty. Because plaintiffs did not successfully plead such a claim, the Court granted defendants' motion to dismiss plaintiffs' Revlon claims.

    Plaintiff did, however, assert claims for breach of the duty of loyalty (outside the purview of the exculpatory clause) with respect to the NYMEX chairman's handling of a potential acquisition with the New York Stock Exchange prior to the acquisition by CME. In order to determine whether plaintiffs lost standing to bring these claims following NYMEX's merger with CME, the Court analyzed the claims to determine whether they were derivative or direct. The Court characterized plaintiffs' claims with respect to the NYMEX chairman as essentially entrenchment claims and claims for breach of fiduciary duty by precluding the likelihood of an alternative, value-maximizing transaction, which are generally viewed as derivative in nature. Further, in order to state a direct claim with respect to a merger transaction, the stockholder must show a causal link between the breach and the ultimate unfairness of the merger. Here, the Court held that all of plaintiffs' claims with respect to the NYMEX chairman were "far too attenuated from the ultimate CME transaction and the price that CME paid to establish a causal link." Thus, plaintiffs' claims were derivative, and as such, plaintiffs lost standing to bring them following NYMEX's merger with CME.

    1The Court did not express a view as to when it should evaluate the stock/cash percentage split for transactions in which that split is not fixed. Here, the stock/cash percentage split changed between the time the board approved the transaction and the closing of the merger because the merger agreement did not contain a collar--a mechanism that would have offered some protection against market fluctuations in CME stock. Additionally, in dismissing the breach of fiduciary claim that challenged the absence of a collar, the Court found it well within the board's business judgment to agree to a transaction without a collar.

    2In re Santa Fe Pac. Corp. S'holder Litig., 669 A.2d 59, 64, 70-71 (Del. 1995).

    3In re Lukens, Inc. S'holders Litig., 757 A.2d 720, 732 n. 25 (Del. Ch. 1999).